South African Rand Slumps for Fourth Day as Bonds Extend Selloff

  • Inflation expectations surge to highest since August
  • Bond yields rise to five-month high as rate increase seen

South Africa’s rand slumped for a fourth day, falling to a 10-week low against the dollar and bond yields climbed to five-month highs as a global debt selloff intensified amid expectations of rising inflation.

The currency fell as much as 1.3 percent before paring the decline to trade 0.7 percent lower at 14.4410 per dollar by 1:50 p.m. in Johannesburg, heading for the weakest closing level since Sept. 2. Yields on benchmark government bonds due 2026 climbed 8 basis points to 9.26 percent, the highest in more than five months. The yield on the country’s 10-year dollar bonds jumped 17 basis points to 5.06 percent, the highest since March.

Sovereign bonds extended a record debt selloff, lifting the 30-year U.S. Treasury yield above 3 percent for the first time since January as investors bet U.S. President-elect Donald Trump’s spending pledge will fuel inflation and trigger U.S. rate increases. Foreign investors sold a net 9.9 billion rand ($683 million) of South African bonds last week, according to JSE Ltd. data.

“A weekend normally brings some calm to agitated markets but we still feel some further rand weakness may be in order,” John Cairns, a currency strategist at Johannesburg-based Rand Merchant Bank, said in an e-mailed note. “It does not seem like it will take much to get markets panicking again.”

The rand may rally as commodity prices increase, said Cairns, who predicted the currency would strengthen to 14 per dollar by the end of the week. South Africa depends on raw materials including copper, coal and iron ore for more than half its export revenues.

Inflation Expectations

Inflation expectations for Africa’s biggest economy, as measured by the five-year breakeven rate, soared to the highest since August, prompting investors to increase bets on a South African rate rise. The five-year breakeven rate has climbed 48 basis points in the past four trading days to 6.6 percent.

Forward-rate agreements starting in 12 months, used to speculate on policy moves, added 40 basis points since the U.S. election and are now pricing in almost 50 basis points of rate increases. As recently as Nov. 3, the contracts had virtually priced out the prospect of policy tightening.

“The problem right now is that there’s no telling how much further this could go,” said George Glynos, managing director and chief economist at ETM Analytics in Johannesburg. “You’ve got U.S. Treasuries that are continuing to sell-off, bond markets around the world are being sold off, there’s a general rotation away from bonds into equities; the safe haven trade is to move back towards the U.S.”

South African stocks were down 0.3 percent, declining a second day.

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