Rand Drops First Day in Four as Central Bank Cautions on Bonds

The rand fell for the first time in four days after South Africa’s central bank said increased borrowing and accelerating inflation risk sending bond yields higher.

Rising prices fueled by the currency’s weakness and the need to finance a widening budget deficit may weigh on government debt, the Reserve Bank said in its Financial Stability Review yesterday. The nation’s bonds remain vulnerable to changes in global investor appetite, according to the report.

The central bank’s warning “sparked continued local selling interest across the spectrum,” Mohammed Nalla, head of strategic research at Nedbank Group Ltd. in Johannesburg, said in e-mailed comments today.

The rand depreciated 0.3 percent to 9.1235 per dollar by 4:02 p.m. in Johannesburg, paring this week’s advance to 1.1 percent. Yields on benchmark 10.5 percent bonds due December 2026 dropped one basis point, or 0.01 percentage point, to 6.85 percent following a seven-point jump in the previous two days. The yield is down three basis points this week.

Foreign investors sold 846 million rand ($93 million) of South African bonds yesterday, bringing net sales in the first four days of the week to 560 million rand and paring this year’s 26.6 billion rand of net purchases, according to data compiled by JSE Ltd. South Africa relies mainly on foreign investment in stocks and bonds to fund the deficit.

Inflation Target

“The rand outlook is a battle between the strong bond inflows and the large net current account outflows,” John Cairns, a currency strategist at Rand Merchant Bank in Johannesburg, said in e-mailed comments. Though bond inflows are close to a record for the year, “data for the past few sessions has been a little disappointing, certainly not supportive of very strong gains in the short term.”

The rand and higher fuel prices remain the biggest risks to inflation and will probably push the rate temporarily above the central bank’s target range of 3 percent to 6 percent, Governor Gill Marcus said April 19. The consumer price index was unchanged at 5.9 percent in March. The nation posted a current-account deficit of 6.5 percent of gross domestic product in the fourth quarter, close to a four-year high.

“Potential rising inflationary pressures stemming from the weaker rand, the wide current-account deficit and continued relatively high funding needs could, over time, weigh on domestic government bond yields,” the Reserve Bank said in the stability report. “The long end of the curve is also at risk from weaker global investor appetite for emerging-market debt, for example, if improving global growth fundamentals entice a shift from bonds to equity investments.”

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