South African Bonds Gain on Inflation Outlook as Rand Climbs

South African bonds rallied, pushing yields on 13-year debt down to the lowest in more than a month as investors’ inflation expectations waned. The rand rose against the dollar.

South Africa’s 15-year break-even rate, the difference in yield between regular and inflation-linked debt, has fallen 23 basis points since reaching a six-month high of 6.83 percentage points Dec. 4. The inflation rate in Africa’s biggest economy fell to 5.3 percent in November, its third month of declines, according to data Dec. 11. South African local-currency debt returned 0.6 percent in 2013, compared with a 16 percent gain in 2012, according to Bank of America Merrill Lynch indexes.

With inflation below the Reserve Bank’s 6 percent upper target, it relieves pressure on Governor Gill Marcus to start raising interest rates next year. Foreign investors are selling South Africa’s currency and bonds for a second month, raising the prospect that it will struggle to fund its current-account deficit.

“The outlook for inflation is better,” Ion de Vleeschauwer, chief currency dealer at Bidvest Bank Ltd., said by phone from Johannesburg today. “We are experiencing some year-end demand for government bonds as investors start to see value in them following a terrible year for bonds.”

Foreign Investors

The yield on rand-denominated bonds due December 2026 fell four basis points, or 0.04 percentage point, to 8.16 percent by 4:16 p.m. in Johannesburg, the lowest since Nov. 20 on a closing basis.

The rand strengthened 0.3 percent to 10.3243 per dollar. The currency has lost 18 percent against the dollar this year, the worst performer among 16 major currencies tracked by Bloomberg. It weakened 1.3 percent in November and a further 1.4 percent so far in December.

Foreign buyers have sold a net 1.19 billion rand ($114 million) of South African bonds this month through yesterday, extending a selloff that started in November, according to data from stock market operator JSE Ltd.

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