South African Bonds Post Weekly Advance Amid Rate Speculation

By Garth Theunissen

Nov. 22 (Bloomberg) -- South African government bonds rose in the week on bets lower oil prices and slowing growth in the continent's biggest economy will prompt the central bank to cut interest rates.

The gains sent 10-year yields to the lowest level in a year as oil traded near its weakest since May 2005. The Bureau for Economic Research cut its 2009 economic growth forecast on Nov. 20 to 1.9 percent, the slowest pace in more than a decade, as the weakening global economy and commodity prices dent exporters' prospects.

``The bond-market mood has turned very bullish and traders are now discounting a rate cut as early as December,'' said Victor Mphaphuli, a portfolio manager who helps oversee about $45 billion at Stanlib Asset Management in Johannesburg. ``The massive drop in oil is making for a more benevolent inflation outlook at a time when the economy is cooling significantly.''

The yield on South Africa's benchmark 13.5 percent security due September 2015 slipped 13 basis points to 8.28 percent by 5 p.m. in Johannesburg yesterday, leaving it 53 basis points lower in the past week. It dropped to 8.14 percent on Nov. 21, the lowest level since November 2007.

The yield on the 13 percent note maturing in August 2010, which is more sensitive to interest-rate expectations, fell 36 basis points to 8.36 percent, a decline of 89 basis points since Nov. 14. Yields move inversely to bond prices.

A 66 percent drop in oil from a record $147.27 a barrel in July may persuade the South African Reserve Bank to cut interest rates from a five-year high of 12 percent to spur economic growth. Crude slipped below $49 a barrel yesterday.

Slowing Growth

Higher interest rates, record inflation and a drop in exports will probably crimp economic growth to 3 percent in 2009 from an estimated 3.7 percent this year, according to the National Treasury. Pretoria-based Statistics South Africa releases its third-quarter gross domestic product data Nov. 25.

``With most of the world heading for recession, growth in this economy is going to be a lot slower next year than many people are expecting,'' said Mphaphuli. ``Third-quarter GDP numbers next week aren't going to look pretty either.''

Policy makers led by Governor Tito Mboweni raised their key interest rate 10 times since June 2006 to quell price growth that exceeded its 6 percent ceiling for 18 consecutive months. Inflation slowed for the first time in more than a year in September, easing to 13 percent from a record 13.6 percent in August. The central bank will decide on rates Dec. 11.

``Apart from a 50-basis-point cut in December, the market is pricing in a rate cut at every monetary policy meeting next year,'' Mphaphuli said. ``That means we could see cumulative cuts of at least 300 basis points in 2009.''

South African policy makers will hold meetings on interest rates six times next year.

The rand declined in the week, losing 4 percent to 10.5375 per dollar. Against the euro it slipped 4.2 percent in the past five days to 13.2429.

South Africa's currency has fallen 35 percent against the dollar this year as investors sold more than 63 billion rand more than they purchased of the nation's assets amid the worst financial crisis since the Great Depression.

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