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Johannesburg - Government bonds weakened sharply and the rand hit a two-month low against the dollar on Monday after a newspaper report, denied by the government, that Finance Minister Pravin Gordhan faces arrest.
The police also dismissed the Sunday Times article, which cited unnamed sources as saying Gordhan would be arrested in a case related to the activities of a spy unit formed when he headed the tax revenue agency.
At 08:57, the yield for the benchmark government bond due in 2026 was up 13 basis points at 9.33%, after jumping as much as 17 basis points earlier.
The rand traded at R15.4905/$, 0.52% weaker from Friday's New York close. The unit hit R15.6800/$ before trade in Johannesburg opened, its weakest level since March 17, according to Thomson Reuters data.
Zuma's office said the Sunday Times story was "the work of dangerous information peddlers who wish to cause confusion and mayhem in the country".
"Political risk has come to the fore again as the Sunday Times reported that the Hawks are just waiting for political guidance to arrest the finance minister. The Presidency has strongly denied this. We take them at their word," Rand Merchant Bank analyst Isaah Mhlanga said in a note.
"The markets will, nevertheless, remain nervous; sensitivities on this issue are very high and the political dynamics will change after the local election."
READ: Gordhan 'arrest' will cause economic earthquake - DA
The elite police investigating unit, the Hawks, is probing the intelligence-gathering tax unit, which was set up in 2007 when Gordhan was the commissioner of the South African Revenue Service.
A public spat between Gordhan and the Hawks linked to the investigation has triggered uncertainty and raised concerns of a repeat of the run on the rand and bonds in December after Zuma changed finance ministers twice in a week.
The stock market was set to open slightly firmer, with the Top 40 futures index adding 0.48%.
