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Johannesburg - Short-dated South Africa bonds fell to their lowest in a month on Thursday as weakness in the rand drove traders to price in an increased chance of further rate hikes this year.
The rand fell to a week low against the dollar during an emerging market sell-off exacerbated by investor views that the US Federal Reserve would press on with its planned tapering programme.
Minutes from the Federal Reserve on Wednesday showed the bank's plan to reduce its monthly asset purchases was intact, surprising some who had thought recent weak US data would see the bank slow down the tapering programme.
The rand fell on Thursday past the psychologically key 11 level to its weakest since February 13. It traded at a session low of R11.1080/$, and by 15:30 GMT was just slightly weaker than the R11.0415/$ New York close on Wednesday.
The currency weakness drove yields on the front end of the yield curve, which are most sensitive to interest rate expectations, to their highest since the start of the month. The 186/157 yield spread dropped to August 2011 levels.
The 2015 yield rose 14 basis points to 7.35%, while the longer-dated 2026 issue climbed only half of that, to 8.665%.
"There's fears of an imminent rate hike," said one bond trader in Johannesburg.
"Investors are now worried the rand will weaken even further, that increases inflation fears and we're now pricing in more chances of an interest rate hike."
The South African Reserve Bank hiked the repo rate by 50 basis points to 5.5% in January, and market players are forecasting this is the start of a tightening cycle by the bank as emerging markets globally try to shore up their weakened currencies.
The rand fell to a week low against the dollar during an emerging market sell-off exacerbated by investor views that the US Federal Reserve would press on with its planned tapering programme.
Minutes from the Federal Reserve on Wednesday showed the bank's plan to reduce its monthly asset purchases was intact, surprising some who had thought recent weak US data would see the bank slow down the tapering programme.
The rand fell on Thursday past the psychologically key 11 level to its weakest since February 13. It traded at a session low of R11.1080/$, and by 15:30 GMT was just slightly weaker than the R11.0415/$ New York close on Wednesday.
The currency weakness drove yields on the front end of the yield curve, which are most sensitive to interest rate expectations, to their highest since the start of the month. The 186/157 yield spread dropped to August 2011 levels.
The 2015 yield rose 14 basis points to 7.35%, while the longer-dated 2026 issue climbed only half of that, to 8.665%.
"There's fears of an imminent rate hike," said one bond trader in Johannesburg.
"Investors are now worried the rand will weaken even further, that increases inflation fears and we're now pricing in more chances of an interest rate hike."
The South African Reserve Bank hiked the repo rate by 50 basis points to 5.5% in January, and market players are forecasting this is the start of a tightening cycle by the bank as emerging markets globally try to shore up their weakened currencies.
