JOHANNESBURG: South African government bonds remained under pressure on Tuesday, amid growing disappointment at last week's large budget deficit and ahead of a bond auction later in the session. The rand was firmer against the dollar and looked to test the 6.95 resistance level again after breaking through it in the previous session due to broad-based dollar weakness and relatively subdued central bank dollar-buying.
Last week, the treasury forecast a bigger-than-expected budget deficit for the financial year ending March 2012, sending the yield spread between the 2015 and longer-dated 2026 notes to record highs.
The spread was at 118 basis points on Monday, and hit 120 early on Tuesday. The previous highest differential was 117 basis points, in July last year.
The treasury is issuing more debt at the longer end of the curve at its weekly auctions, driving dealers to sell some of their longer-dated stock to make space for the auction.
The 2018 and 2021 bonds are up for auction this week and results are due at 0900 GMT.
The rand was firmer at 6.9595 against the dollar at 0650 GMT, from a close of 6.97.
Dealers are watching for consecutive closes below the 6.95 resistance level for confirmation of the rand's break of that resistance zone.
That level has provided strong support for the dollar as it also roughly coincides with the 50 percent retracement of its earlier rise this year, begun on Jan. 3.
If convincingly broken, the rand could head for 6.85.
"The market is caught long dollar, and at the moment the central bank seems to be a lot less active than they have been in the last four to six weeks," a currency dealer said.
"With a market that's been caught long we've come down to test the breakout. Maybe we can get down to the 6.88/85 area but I'll be surprised if the Reserve Bank allows it to go to 6.50." Stock futures pointed to a higher open on the bourse as the JSE's blue chip Top-40 March futures contract edged up to 0.56 percent before the 0700 GMT start of stock trading.
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