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Rand fragile, bonds weak

Johannesburg - Yields on South African 15-year government bonds hit a seven-month high on Thursday as investors shifted to short-term safe-haven debt amid fears of a worsening EU credit crisis, while the rand firmed but looked vulnerable against the dollar.

The yield on 15-year benchmark jumped to 8.73%, while that on the 4-year bond rose to just above 7% - a two-month high.

The trigger was an unsuccessful German auction on Wednesday that drove investors to safe haven bonds regardless of their smaller yield, fearing the debt crisis might engulf the whole euro region.

Slightly higher-than-expected domestic inflation numbers on Wednesday also hit local bonds.

“The failed German auction just put risk-off, and with CPI printing a bit too high yesterday, rate cuts are definitely off the table and that puts pressure on the short end,” said Steve Arnold, a bond trader for Investec.

Consumer inflation hit the top end of the central bank’s 3% - 6% target on Wednesday. Dealers that were long on shorter-dated paper in anticipation of reduced rates would have sold off as the market repriced interest rate expectations.

Economists expect a slight increase in October's producer price inflation year-on-year, due at 09:30 GMT.

The rand was at R8.555 against the dollar at 06:50 GMT, threatening to test Wednesday's 2-1/2 year low of R8.61.

The rand is expected to breach that level if more bad news emerges from Europe. Its next support is seen around R9.00, a level it last hit in April 2009.

 
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