Federal Reserve chairperson Ben S Bernanke.
Yields on 10.5% notes due December 2026 climbed 17 basis points, the most since October 8, to 7.37% at 12:41pm in Johannesburg. The yield has increased 61 basis points this month, the steepest since February 2009, according to data compiled by Bloomberg. Ten-year US treasury yields rose to the highest level in more than 13 months as bonds worldwide headed for the steepest monthly loss since 2004.
While the central bank forecasts only a temporary breach of its 3% to 6% inflation target this year, it's concerned that the rand's decline may make imports more expensive and increase wage demands as the economy slows and the trade deficit soars. That is increasing risks for foreign investors, who sold a net R1.73-billion ($176-million) of South African bonds in the first two days of this week.
The surge in yields "is pretty much rand-driven, and offshore accounts have been sellers of local debt", Alvin Chawasema, a bond trader at Renaissance BJM Securities, said by phone from Johannesburg. "If you look ahead at the strike season, wage increases may be a lot higher than anticipated, and that is playing into the long end of the curve."
Steepening Curve
South Africa's currency depreciated 0.5% to 9.8316 per dollar, bringing its decline this month to 8.8%. The inflation rate rises as much as 0.2 percentage point for every 1% decline in the rand, according to Johannesburg-based Standard Bank Group. Inflation was unchanged for a third month at 5.9% in April. The difference in yield between two- and 30-year bonds climbed 52 basis points this month to 306, the biggest gap since March 18.
Federal Reserve chairperson Ben S Bernanke said last week the central bank could cut the pace of asset purchases, which have contributed to demand for higher-yielding emerging-market bonds, if officials see indications of sustained improvement in economic growth.
South Africa's gross domestic product expanded 0.9% in the first quarter, less than the most pessimistic forecast of 15 economists in a Bloomberg survey, as manufacturing and agriculture contracted. Slower growth may curb tax revenue and make it harder for the government to rein in its budget deficit – a concern raised by Moody's Investors Service and other rating companies when downgrading South Africa in the past eight months.
Social Unrest
Concern is growing that pay talks scheduled for June will spark more unrest in the mining industry, which accounts for more than 50% of South Africa's exports. The weak rand's contribution to inflation kept the central bank from cutting interest rates on May 23 to stoke growth, which policy makers forecast will be the slowest this year since the 2009 recession.
"South African yields have weakened as a result of both the global trend as well as the weaker rand and poor foreign demand," Brigid Taylor, head of institutional flow sales at Nedbank Group in Johannesburg, said in an email.
"We're at the mercy of social tensions and knock-on negative offshore sentiment amid US strength." – Bloomberg