S. African Bond Yields Surge as Inflation Quickens; Rand Weakens

Yields on South African bonds jumped to the highest level in 19 months as inflation accelerated more than estimated and the rand slipped to a six-week low before the release of minutes of the Federal Reserve’s July meeting.

The inflation rate in Africa’s biggest economy rose to 6.3 percent in July from 5.5 percent in June, breaching the upper end of the central bank’s 3 percent to 6 percent target for the first time in 15 months. The median estimate in a Bloomberg survey of 22 economists was 6.2 percent. The Federal Open Market Committee today publishes minutes of its meeting last month, which may provide guidance on the bank’s stimulus plans.

“The impact of the inflation data is mainly on our bonds, which are coming under a lot of pressure,” Gareth Brickman, a market analyst at ETM Analytics, said by phone from Johannesburg. “The rand is weakening in line with emerging-market currencies.”

Yields on benchmark 10.5 percent bonds due December 2026 climbed as much as eight basis points, or 0.08 percentage point, to 8.62 percent, before retreating to 8.59 percent. That’s the highest on a closing basis since January 2012. The rand slumped as much as 1.2 percent to 10.2782 per dollar, the weakest level since July 8. It traded at 10.2295 as of 4 p.m. in Johannesburg. The dollar also strengthened against currencies from the Turkish lira and Mexican peso to Thailand’s baht and Australia’s dollar.

‘Upside’ Risks

Risks to inflation “remain to the upside depending on currency weakness, petrol price hikes and wage adjustments,” Kevin Lings, chief economist at Stanlib Asset Management Ltd., said in e-mailed comments. “The Reserve Bank is unlikely to consider cutting rates despite a weakening economy and instead will look to keep interest rates on hold for an extended period.”

The breach in the inflation target will be temporary with the rate averaging 5.9 in 2013, Governor Gill Marcus said on July 18, when announcing the benchmark repurchase rate would stay at 5 percent. The Reserve Bank forecasts South Africa’s economy will expand 2 percent this year, which would be the slowest pace since the recession in 2009.

The Fed will publish its July 30-31 meeting minutes, which may offer clues on whether policy makers will start reducing their $85 billion of monthly bond purchases known as quantitative easing. The Federal Open Market Committee next gathers on Sept. 17-18 and will probably decide to reduce the program at that meeting, according to 65 percent of economists surveyed by Bloomberg News from Aug. 9-13.

“The main uncertainty and driving force behind the sell-off has been and will continue to be the uncertainty surrounding Fed policy and the impact of tapering on capital flows,” Carmen Nel, a Cape Town-based analyst at Rand Merchant Bank, said in e-mailed comments. “While most commentators note that tapering should not have a meaningful impact, market sentiment does not reflect this benign perspective.”

Foreign investors bought a net 689 million rand ($67 million) of South African bonds yesterday, paring net outflows this month to 485 million rand, according to JSE Ltd. data.

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