Bonds Extend Rally Ahead of Linker Auction

JOHANNESBURG (Capital Markets in Africa) – South Africa’s 10-year government bonds rose for a fourth day, set for the longest winning streak in two months, ahead of National Treasury’s inflation-linked bond auction, scheduled later Friday. The rand weakened against the dollar, broadly in line with other emerging-market currencies.

National Treasury plans to sell 900m rand ($63.4 million) across inflation-linked bonds maturing in 2029, 2033 and 2050. This is the first linker auction with an increased issuance size, 100m rand more, since Finance Minister Malusi Gigaba’s medium-term budget speech in which he said the government would sell more debt to address a widening deficit.

• Yield on rand-denominated 10-year government bond falls by 3bps to 9.32%, after dropping 12bps in previous 3 days
  • “We anticipate another fully-allocated auction but at yields, once again, above mark-to-market,” writes Rand Merchant Bank fixed-income analyst Gordon Kerr
  • “This reflects, firstly, a distinct lack of demand for linkers ahead of the November rating review. Secondly, with the new auction size, National Treasury has been willing to allocate bonds at higher yields, rather than just failing the auction and keeping yields low. These two elements have helped to push real yields higher and we anticipate that Friday’s auction will be no different,” writes Kerr
• Rand weakens 0.2% to 14.1877/USD, after gaining 1.6% Thursday
• “The easing of global risk aversion has allowed the rand to finally unwind the local-politics-induced losses of last week,” writes Rand Merchant Bank strategist John Cairns in a note to clients
  • Situation in Zimbabwe is “fluid” and has not had any meaningful affect on the rand but it still could
  • Data and events calendar relatively empty but the volatility is likely to remain high as the rand tries to find a level at which to settle: Cairns
• USD/ZAR may trade Friday in 14.05-14.25 range: Nedbank