Bonds firm on hopes of a rate cut

Johannesburg - South African bonds were firmer in midday play trade on Wednesday, as the Reserve Bank's Monetary Policy Committee (MPC) meeting gets underway today. The interest rates decision takes place on Thursday, shortly after 15:00.

Market players across the board are expecting a rate cut at the MPC meeting. Hopes have been pinned on a cut after lower than expected inflation, the stronger rand and fragile economic recovery, as suggested by the second quarter 3.2% growth compared to 4.6% in the first quarter.

By 11:30 the benchmark R157 bond was at 7.195% from 7.220% at its close on Tuesday. The benchmark R207 was bid at 7.875% and offered at 7.840% from 7.880%, while the R186 was bid at 7.895% and offered at 7.870% from 7.930%.

The rand was bid at R7.2696 to the dollar from R7.2512 at its previous close.

"Bonds are firmer ahead of the rates decision, players have factored in a cut. We've seen better sellers in the day," said a local trader.

Earlier on Wednesday another trader said that players were squaring off their positions ahead of the MPC meeting so they won't be at risk after the decision.

According to a survey of 14 leading economists by I-Net Bridge, a 50 basis point cut is expected for South Africa's repo rate at the MPC meeting.

"This is on the back of much lower inflation - but I am concerned that inflation will slowly start to increase again while the speed at which inflation may rise later - say early next year may make the repo cut one of only six or eight months. I know that I would not want a rate cut but I think on the back of what the Governor has said we will now see that rate cut," said Economists.co.za's Mike Schussler.

The Treasury on Wednesday announced it would auction R1.1bn worth of R208 bonds and R1.0bn worth of R213 bonds on September 14 at its regular weekly auction.

Foreigners were net buyers of R3.840bn of South African bonds including repo transactions on Tuesday, after net sales of R798.542m of local bonds on Monday, Bond Exchange of South Africa statistics show.

Nominal cumulative volume was R175.708bn on Tuesday from R33.526bn on Monday.
 
Foreigners were net buyers of R3.830bn of South African bonds excluding repo transactions on Tuesday, after net sales of R800.613m of local bonds on Monday.

In the year to date foreigners have been net buyers of R74.905bn worth of local bonds, excluding repo transactions.

So far for total transactions, including repo transactions, foreigners have been net buyers of R67.443bn worth of bonds.

In 2009 foreigners were net buyers of R27.755bn worth of local bonds, excluding repo transactions, while for total transactions, including repo transactions, foreigners were net sellers of R2.424bn worth of bonds.