Johannesburg - Yields on South African debt extended lows to
fresh records on Friday morning, supported by an interest rate cut in the
previous session, while the rand weakened due to the bleak domestic and global
economic outlooks.
The Reserve Bank surprised the market on Thursday by cutting
its repo rate by 50 basis points to 5%. It also cut its growth and inflation
forecasts.
The yield on the 2015 bond dropped to a record 5.32%, while
the 2021 issue fell to 6.425%.
The rand was down 0.3% to 8.20 at 06:50 GMT, off a R8.1750
close in New York on Thursday.
Analysts say closes above the R8.20 level will signal
convincing rand weakness.
“Yesterday’s monetary accommodation could encourage foreign
bondholders due to the capital appreciation gains they would have enjoyed as
result of yesterday’s rate cut,” Absa Capital said in a note.
“Especially if they believe that yesterday’s monetary
accommodation is unlikely to be a one-off affair.”
The dovish inflation tone could also result in less demand
for inflation-linked bonds as investors see less need to hedge against rising
inflation.
Yields are likely to head lower in line with the nominal
bond yields.
Treasury is selling a total of R800m of its three new
inflation-linked I2025, I2050 and I2038 bonds on Friday.
Investors are buying the front end of the yield curve in
reaction to the rate cut. However if the market prices in more rate cuts this
year, money could also go into the long end, adding to offshore players already
piling into that space.
The money market has started to price in another cut this
year, with 3x6-month forward rate agreements moving to 4.80%, suggesting a 40%
chance of another 50 basis point cut by the end of the year.