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south-africa-bond JOHANNESBURG: South African government bond yields fell to record lows and the rand weakened against the dollar on Thursday after the Reserve Bank cut its key lending rate, sounding a dovish tone on inflation and trimming its economic growth forecasts.

The Reserve Bank cut its key lending rate by 50 basis points to 5.0 percent, surprising the market. Only two out of 23 economists polled by Reuters had anticipated the cut.

Yields on the front end of the curve extended earlier declines to record lows after the rate reduction and the Bank's lower inflation forecasts, widening the yield spread between the three- and 14-year bonds by 8 basis points.

"I think the market was expecting a cut this year but not at this meeting," said Garth Klintworth from Absa Capital.

"It is attractive for short term bonds - bonds shorter than the 2017. As for long-term bonds, the governor mentioned the fact that there is a hunt for duration from around the world but at some point people have to be a little bit cautious."

Yields have trekked lower in recent months as foreigners have persistently bought higher yielding South African debt. However dealers say the rally cannot last forever.

The yield on the 2015 bond plunged 34 basis points to hit a fresh record of 5.39 percent compared to 5.73 before central bank Governor Gill Marcus started her speech.

The rand weakened more than 0.3 percent during the course of Marcus's 17 minute speech, in which she outlined the intensifying risks to domestic growth, and then spiked as low as 8.21 before recovering to 8.19 against the dollar at 1447 GMT.

The short-term money market started to price in another cut this year, with 3x6-month forward rate agreements moving to 4.86 percent, suggesting a 28 percent chance of another 50 basis point cut by the end of the year.

Copyright Reuters, 2012