Stephen Gunnion
25 November 2008
Johannesburg — GOVERNMENT bonds continue to rally as weak oil prices tame inflation expectations, lifting the chances of an interest rate cut as early as next month.
Bond yields fell yesterday for the seventh day running with the benchmark R157 yield falling 12 basis points to 8,14% and the R153 19 points to 8,25%. Bonds have been improving since July, when the yield on the R157 peaked at 10,86%.
Analysts said bonds were pricing in rate cuts of 400 basis points from now to the end of next year, with the first likely at next month' s Reserve Bank monetary policy committee meeting.
While there is concern that cutting rates may weaken the rand as it narrows the gap between interest rates in SA and those of potential investors, Investec Asset Management portfolio manager Malcolm Charles said it was far more important to preserve growth in the economy going into next year than to keep rates at today's levels.
Rand volatility now meant investors were unlikely to put cash in SA solely on high interest rates. "Capital is going to follow growth; this is going to be the differentiating time for emerging markets," Charles said. "If we can get positive growth of 2,5%-3%, capital will be attracted to our shores." With the oil price's fall, inflation would rise at a much slower pace next year.
Sanlam Investment Management head of fixed interest André Roux said lower oil and food prices and reweighting of the inflation basket in January had changed inflation expectations.
"There's a theme coming through that growth is going to be lower than expected. As a result, the Reserve Bank is going to have to cut interest rates quicker than expected."
Charles said the recent rally in bonds was aided by foreign investors who had been short-selling SA's bonds and now had to cover their positions. SA's investors had also been short of bonds in their balanced funds, and had become buyers of government debt.
Valuations were getting stretched. If this week's inflation figures surprised on the downside and economic growth had slowed more than expected, then bond yields could improve further.
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