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imageJOHANNESBURG: Yields on South African government bonds dropped to two-week lows on Friday, reflecting an upbeat mood in emerging markets as a falling oil price improves prospects for benign inflation.

The South African Reserve Bank is due decide on interest rates next week and dealers say the combination of moderating inflation domestically, a relatively stable rand and the lower price of Brent crude should see the central bank stay put on interest rates.

The yield on the benchmark 2026 bond fell 7.5 basis points to 7.85 percent, its lowest since Oct.31 when it hit the year's low. The currency gained nearly 0.6 percent to 11.1445/dollar as importers took advantage of the current levels.

"The local fixed income and currency markets strengthened over the past five trading days, broadly in line with favourable emerging market financial market movements and possibly on the back of better performances recorded across the US Treasury curve," Asher Lipson, a fixed income strategist at Standard Bank said.

Standard Bank said offshore investors were net buyers of 2.15 billion rand of government bonds in the past five days with buying across all maturities.

Foreigners had sold 600 million in local debt last week. Next week investors will also have inflation numbers to contend with. Prices are expected to have steadied in October, but if they surprise to the downside, it will add to views that the central bank will not raise interest rates until next year.

The week will open with a speech in Cape Town by Reserve Bank Deputy Governor Francois Groepe at 0645 GMT, where the market will look for any clues on the bank's expected revisions to growth and inflation estimates compared to its last rates decision in September.

Copyright Reuters, 2014