South African bond yields rise on hawkish central bank

JOHANNESBURG: South African government bond yields rose after the Reserve Bank kept its key repo rate on hold on Thursday, saying the inflation outlook had deteriorated and signalling a more hawkish tone than the market had expected.

The rand largely held on to the day's gains against the dollar after Governor Gill Marcus announced the key repo rate would stay unchanged at 5.5 percent, as expected.

The yield on the 2015 bond rose to 6.67 percent from 6.63 percent just before Marcus's announcement, although it was down one basis point on the day.

The yield for the longer-dated 2026 issue was slightly higher at 8.4 percent at the close, from 8.38 percent just before the rates announcement at 1318 GMT.

"We saw the curve sell off a little bit after the speech. There was no movement (in rates) as expected but the tone of the meeting was a little bit more hawkish than the market perhaps had priced in," Absa Capital bond trader Daniel Sabiston said.

"The 157's have sold off a bit ... so that's put a little bit of pressure on the short end of the curve, but we've continued to see buying on the long end so that's basically flattened out the bond curve."

The Reserve Bank said in a statement that inflation would peak at 6.6 percent in the second quarter of this year , only returning to the target range, of 3-6 percent, in the first quarter of 2013. In November, the Bank had expected inflation to peak at 6.3 percent in the first quarter of this year.

Marcus said the Bank did not discuss reducing interest rates, a hint that monetary loosening might be off the table despite still sluggish economic growth.

The rand firmed to 7.9150 against the dollar just after the rate call from 7.9334 and was at 7.9175 by 1640 GMT, up 0.55 percent on the day. It was however off a fresh two-month high of 7.9022 reached earlier on Thursday.

The Reserve Bank said the outlook for the rand, which fell about 23 percent against the dollar last year on risk aversion, remained highly dependent on global risk appetite.

It noted, however, that the rand had been relatively stable in the last few weeks, adding: "consensus forecasts reflect an expectation that the current levels will be sustained for a protracted period."

Copyright Reuters, 2012