South Africa Bond Yields Rise to Highest in Year on Rate Outlook

Bonds fell, driving yields to the highest in a year, after South African Reserve Bank Governor Gill Marcus said the central bank has little room for an interest-rate cut. The rand strengthened.

Rising inflationary risks limit the bank’s scope to lower borrowing costs further to stimulate growth in Africa’s biggest economy, Marcus said today. The bank said June 4 that interest rates, which have been kept at 5 percent since July, are helping maintain “price stability and support the economic recovery.” The consumer price index has been above the 4.5 percent mid-point of the central bank’s target range since June 2011.

“As long as inflation remains at these levels they can’t cut rates; that’s the message the market reads into these comments,” Ion de Vleeschauwer, the Johannesburg-based chief dealer at Bidvest Bank, said by phone. “People will have to think a little before shorting the rand, but it’s not good for bonds and equities.”

Yields on 13.5 percent bonds due September 2015 climbed 14 basis points to 6.11 percent as of 4:53 p.m. in Johannesburg, the highest on a closing basis since June 15 last year. The yield has jumped 47 basis points in the past two days. South Africa’s currency gained 0.4 percent to 9.9710 per dollar, rebounding from an earlier drop of 0.8 percent.

“We have limited room for maneuver,” Marcus said in a speech in Johannesburg today at a conference hosted by the Bureau for Economic Research. “While monetary policy remains tolerant of inflation at the upper end of the target range or of temporary breaches, the increasingly risky outlook for inflation, and its possible impact on inflation expectations, does constrain further accommodation.”

Rand Risk

The rand’s 15 percent decline this year is the primary risk to inflation, the central bank said in its Monetary Policy Review yesterday.

Forward-rate agreements starting in 12 months are pricing in rate increases over the next year. Yields on the contracts jumped 21 basis points today to 6.14 percent, or 101 basis points more than the Johannesburg Interbank Agreed Rate.

“Adjustments in the FRAs and the local yield curve point to a material reassessment in the market regarding monetary policy prospects,” Bruce Donald, a strategist at Standard Bank Group Ltd. in Johannesburg, said in e-mailed comments. “By explicitly highlighting the rand as the main upside risk to inflation, the MPC has in a sense made thinking around monetary policy prospects more exchange-rate dependent.”

The dollar weakened against most of its 16 major peers before data that may show the U.S. job market isn’t expanding at a rate fast enough for an early reduction in the Federal Reserve’s bond purchases, known as quantitative easing. The unemployment rate in the world’s largest economy probably remained unchanged in May, data may show tomorrow, according to the median estimate of economists in a Bloomberg survey.

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