Bond yields surge as inflation quickens, rand weakens

The inflation rate in Africa’s biggest economy rose to 6.3% in July from 5.5% in June, breaching the upper end of the central bank's 3% to 6% target for the first time in 15 months. The median estimate in a Bloomberg survey of 22 economists was 6.2%. 

The US 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," said Gareth Brickman, a market analyst at ETM Analytics. "The rand is weakening in line with emerging-market currencies."

The rand slumped as much as 1.2% to 10.2782 per dollar, the weakest level since July 8. It traded at 10.2423 as of 11:45am in Johannesburg on Wednesday. The dollar also strengthened against currencies from the Turkish lira and Mexican peso to Thailand’s baht and Australia’s dollar. 

Yields on benchmark 10.5% bonds due December 2026 climbed eight basis points, or 0.08 percentage point, to 8.62%, the highest on a closing basis since January 2012.

'Upside' risks
Risks to inflation “remain to the upside depending on currency weakness, petrol price hikes and wage adjustments,” said Kevin Lings, chief economist at Stanlib Asset Management. "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%. The Reserve Bank forecasts South Africa's economy will expand 2% this year, which would be the slowest pace since the recession in 2009.

The Fed will publish its July 30-31 meeting minutes that 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 September 17-18 and will probably decide to reduce the program at that meeting, according to 65% of economists surveyed by Bloomberg News from August 9 to 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," said Carmen Nel, a Cape Town-based analyst at Rand Merchant Bank.

"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 R689-million of South African bonds yesterday, paring net outflows this month to R485-million, according to JSE data. – Bloomberg.

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