South African bonds firm in uncertain trade

JOHANNESBURG: South African government bonds edged higher on Friday and yields were off multi-week highs as investors ventured back into local debt ahead of what is likely to be a dovish pronouncement from the central bank next week signalling rate cuts down the line.

The rand traded slightly firmer against the dollar after falling to 6-1/2 week lows on Thursday, although the market is still plagued by uncertainty over the debt crisis in Greece and other euro zone countries.

The yield on the benchmark four year bond was four basis points lower at 6.77 percent and that for the 2026 bond gave up 3.5 basis points to 8.165 percent.

The central bank holds its fifth policy meeting of the year next week amid concerns about slowing growth, which has caused markets increasingly to price in lower rates if not this year, then in 2012.

But a sharply weaker rand over the last couple of months and the rising inflation pressures this has brought could see the Reserve Bank's monetary policy committee (MPC) opt to leave rates at their current three-decade lows.

"There's a lot of uncertainty and your direction in the bond market right is all flow-driven at the moment," Investec bond trader Steve Arnold said.

"This week foreigners were big sellers in the short end of the curve but off the lows we did see local funds into the market for the first time in a while, where they saw value with high yields."

"With Russia, a fellow BRICS member, surprising the markets by cutting rates early this week and recent comments by the Reserve Bank economist showing worry about a slowdown in domestic growth, I would expect to see dovish comments coming out of the MPC," Arnold added.

The rand, which has breached key technical levels of 7.00 and 7.20 against the dollar in recent weeks, was off this week's low of 7.4825 touched on Thursday. But traders said a renewed attack on the currency could push it back towards its next support level of 7.5.

By 0645 GMT the rand was up 0.31 percent at 7.37 versus the dollar after closing in Thursday's New York session at 7.3930.

The JSE securities exchange's Top-40 December futures contract was up 0.75 percent, pointing to a positive start for the bourse at 0700 GMT.

Copyright Reuters, 2011