South African Bonds, Rand Advance on Easing Inflation Concern

By Garth Theunissen

July 24 (Bloomberg) -- South African government bonds rose and the rand traded within eight euro cents of a seven-week high against the common European currency as easing oil prices reduced concern that inflation will keep accelerating.

The gains drove the yield on the benchmark 2015 note 13 basis points lower, the biggest drop in more than a week, after the Bond Exchange of South Africa said foreign investors were net buyers of 1.4 billion rand ($185 million) of the nation's debt yesterday. The rand also advanced against 10 of the 16 most-actively traded currencies monitored by Bloomberg as oil stayed near $125 a barrel for a second day.

``South African yields are particularly high and that is helping the rand,'' said Tolga Ediz an emerging-market currency strategist in London at Lehman Brothers Holdings Inc. ``South Africa's bond market has done quite well due to the moderating oil price. That helps calm inflation fears, and encourages foreign purchases.''

The yield on the 13.5 percent security due September 2015 dropped to 9.75 percent as of 1:41 p.m. Johannesburg, from 9.88 percent yesterday. The yield was at 10.85 percent at the start of July. South Africa's 13 percent note due August 2010, which is more sensitive to interest-rate expectations, fell 13 basis points to 10.67 percent. Yields move inversely to bond prices.

The rand strengthened after JPMorgan Chase & Co. raised South African equities to ``overweight'' from ``neutral.'' The FTSE/JSE Africa All Share Index climbed as much as 0.9 percent, its second day of gains.

Rate Increase

The South African currency gained as much as 0.6 percent to 11.8160 per euro, before trading at 11.8605. It rose to 11.7829 yesterday, the highest level since May 30. The rand was little changed at 7.5737 per dollar, from 7.5687 yesterday, when it rallied to 7.4650 per dollar, the strongest since May 30.

Bond yields and the rand have climbed since June 12, when the South African Reserve Bank raised the key interest rate by a half-point to 12 percent. Policy makers lifted the rate 10 times since June 2006 to curb inflation that has exceeded its 3 percent to 6 percent target range for 14 months.

Price growth quickened to an annual 10.9 percent in May, the fastest since November 2002, partly as oil surged. South Africa relies on imports for about two-thirds of its oil needs.

Crude, little changed at $124.77 a barrel in New York today, has declined 13 percent since reaching a record $147.27 July 11.

Carry-Trade Returns

The rand has offered the best carry-trade return against the dollar, euro and yen since June 12, according to data compiled by Bloomberg. It had the sixth-best carry trade return against the euro today.

``There is a carry-trade story that has helped emerging markets decouple somewhat from global risk sentiment,'' Ediz said.

In carry trades, investors borrow a currency at a low interest rate and convert the proceeds into one they can lend out for a higher return, earning the spread between the two. They take the risk currency moves will erase their profit. South Africa's main interest rate is 1,050 basis points above Japan's and 925 basis points higher than Switzerland's.

The rand is ``ripe for a correction'' against the U.S. dollar given accelerating inflation and a slowing economy, Bank of America Corp.'s New York-based senior trading strategist Lawrence Goodman said in an interview yesterday.

The currency is the worst performer of its 16 most-traded counterparts monitored by Bloomberg this year, falling 8.8 percent versus the dollar and more than 15 percent against the euro.

To contact the reporter on this story: Garth Theunissen in Johannesburg gtheunissen@bloomberg.net.