South African Yields Hit Record Lows as Rand Gains on Rates

South African bonds rose, driving two-year yields to record lows, on speculation the central bank will cut borrowing costs to bolster growth. The rand strengthened.

The central bank needs to “continue to support economic growth and employment,” Finance Minister Pravin Gordhan said in an interview with Reuters today. Forward-rate agreements are pricing in a better-than-even chance of a rate cut this year. The South African Reserve Bank has left its benchmark repo rate at a three-decade low of 5 percent since a surprise cut of 50 basis points in July.

“Investors remain comfortable pricing rate cuts into the FRA curve with Finance Minister Gordhan’s comments this morning on monetary policy providing support in this regard,” George Glynos, a Johannesburg-based analyst at ETM Analytics, said in an e-mailed comment today. Mining and manufacturing data tomorrow “could provide further support” for rate-cut hopes, he said.

Yields on benchmark 13.5 percent bonds due September 2015 dropped five basis points, or 0.05 percentage point, to 5.04 percent at 5 p.m. in Johannesburg, the lowest on record, according to data compiled by Bloomberg. The rand, the worst performer this year among 24 emerging-market currencies tracked by Bloomberg, gained 0.2 percent to 9.0124 per dollar, paring its decline for 2013 to 6 percent.

Mining output, which accounts for half the nation’s exports, slowed to 4 percent in March from 7 percent the previous month, a report tomorrow will show, according to the median estimate of economists in a Bloomberg survey. Manufacturing likely grew 1.8 percent, a separate report may show. Unemployment rose to 25.2 percent in the first quarter, from 24.9 percent, data showed on May 6.

Forward-rate agreements starting in December dropped five basis points today to 4.8 percent, or 33 basis points lower than the Johannesburg Interbank Agreed Rate. The contracts are pricing in a 66 percent chance of a 50 basis-point rate cut by the year-end.