Forget about inflation, the current-account deficit and growth. Investors in South African bonds are only interested in one thing: the Federal Reserve.
While data on South African consumer prices and the balance of payments this week hardly moved the bond market, yields plummeted the most in 10 months the day after the Fed signaled it’s in no hurry to raise borrowing costs. South African interest-rate derivatives pushed out predictions of monetary tightening.
The Federal Reserve on Wednesday cut its estimate for where the benchmark U.S. interest rate will be by the end of 2015, easing concern that tighter monetary policy would curb demand for riskier assets including South African debt, and force the South African Reserve Bank’s hand. South African forward-rate agreements, which as recently as March 10 predicted a rate increase in July, are now betting the central bank will sit tight until at least September.
“The big factors are international: what is the U.S. going to be doing?” Isaac Matshego, an economist at Nedbank Group Ltd. said by phone from Johannesburg on Thursday. “When the U.S. starts hiking, the Reserve Bank will have to respond to that so that it’s not left behind the curve.”
A June increase by the Fed would result in the South African central bank raising its policy rate 25 basis points in November, Matshego said. Leaving the rate unchanged would erode the rand’s yield advantage over the dollar, damping investor demand for South African assets.
Yields on benchmark rand bonds due December 2026 dropped as much as 19 basis points on Thursday, the most since May 8. The yield fell one basis points to 7.78 percent by 6 p.m. in Johannesburg on Friday. Forward-rate agreements starting in 12 months fell 13 basis points to 6.77 percent on Thursday as investors pared bets on rate increases in the economy with Africa’s biggest capital markets. The day before, when a report showed the consumer price index at a four-year low, the contracts climbed two basis points.
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