JOHANNESBURG: The rand leapt and South African government bond yields logged their steepest drop in nearly three years on Tuesday as news that local debt could be included in Citigroup's main global bond index boosted demand from local and foreign accounts.
The rand jumped more than 1.8 percent against the dollar, performing the best among 20 emerging market currencies on the view that inclusion in Citigroup's World Government Bond Index could trigger billions of dollars worth of portfolio flows.
The yield on the 2026 issue fell as much as 30.5 basis points, the sharpest one-day fall since May 2009, before coming back to 8.155 percent by the close, down 24 basis points from Monday's level.
The yield on the three-year benchmark tumbled 21 basis points to 6.51 percent.
Citi said South Africa was currently in a three-month "monitoring period" to make sure it continued to meet index entry requirements to the WGBI. These are based on issue size, ease of entry and credit rating, all of which were passed in April.
"If you are included into that index it will mean South African bonds will need to be bought for guys tracking that index, especially areas of the yield curve near the likely duration of that index, determined at round about 10 years," said Marten Banninga, head of bond trading at WWC Securities.
"So any bond which is in close vicinity of that maturity will be bought more aggressively. It does indicate that your 186 bond is going to be one of your favourites because it suits the criteria," Banninga added, warning however that Tuesday's rally might have been overdone and not sustainable.
The news also cheered the rand, which rose more than 1.8 percent at one point and was at 7.7918/dollar by 1615 GMT, up 1.74 percent from Monday's New York close at 7.93. It ranked top in a basket of EM currencies monitored by Reuters.
Analysts said inclusion in the WGBI could see its trackers buy as much as $9 billion of South African government bonds. It would also be a huge balm for the government after all three major ratings agencies cut the outlook on the country's credit rating to negative from stable.
"Should Citigroup decide to include South African bonds in the WGBI, it would further aid South Africa and its state-owned companies to raise funds for the huge infrastructure programme," the National Treasury said in a statement.
The WGBI currently has 22 countries, with Malaysia, Poland and Mexico the only emerging markets included. A final announcement is expected at the end of June, and South Africa's formal inclusion would then commence in October, Citi said.