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EU fears knock SA debt auction demand

Johannesburg - Demand for South African bonds fell to its lowest level in more than a year at a weekly government auction on Tuesday, as a risk-averse trading environment added to concerns that there was an oversupply of paper.

The Treasury offered R1.5bn in 2020 notes and R600m in 2031 paper. Both issues cleared higher than at their previous auction, but drew lower cover ratios.

The nine-year notes were only 1.8 times covered, while the longer-dated 20-year paper was 1.5 times covered.

All primary dealers in South Africa have to take part in the sale, ensuring the auction is always covered.

"Simply put, this was a very poor auction outcome. The high percentage of bids that were successful indicates small bid sizes. This tells us few people wanted these bonds, and those that did bid, bid in small clips at high yield levels," Citi said in a note after the auction.

Total bids at the auction came in at just under R3.6bn - the lowest seen in a weekly government auction since around April 2010, said Sean McCalgan, market analyst at ETM.

Investors are dumping risky assets including African assets as the eurozone debt crisis is seen spreading from the region's periphery to the core economies of Italy and Spain.

The rand fell more than 1.4% to a session low of R6.95/$ on Tuesday, a level last seen on May 27.

Dealers said they were waiting for clarity on the terms of a second bailout for Greece now under discussion before taking bigger positions in South African assets, for fear of being caught long if the eurozone crisis deteriorates further.

"The eurozone story is the main driving force at the moment. A lot of investors would also have been taking into account the Eskom bond auction tomorrow," ETM's McCalgan said.

Power utility Eskom is set to issue bonds due in 2023 and 2026 in the local market on Wednesday and some dealers were probably selling government paper maturing close to those dates on Tuesday to raise funds and make room in their portfolio for the new issues.

The yield on the 2015 government note rose 6 basis points to 7.56%, while the yield on the 2026 bond increased 7 basis points to 8.63%.

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