Money flooding into South African bonds

South Africa’s rand strengthened to a six-month high against the dollar, and bonds rallied after an auction of government debt attracted the strongest demand in almost three months.

Primary dealers placed orders for R14.79 billion of debt at the National Treasury’s weekly sale of fixed-rate bonds on Tuesday, nearly six times the 2.55 billion rand offered.

“Given the selloff seen in bonds last week, the outright levels of South African government bonds are attractive,” said Michelle Wohlberg, a fixed-income analyst at Rand Merchant Bank.

About R49 billion rand in coupons due at the end of the month also drove re-investment demand, she said.

The overall bid-to-cover ratio of 5.8 compares with 4.6 at last week’s sale and is the highest since the June 2 auction.

Debt maturing in 2037 saw the strongest demand, with orders of R6.71 billion for R850 million on offer.

Notes due 2039 drew orders of R4.12 billion, and 2042 securities attracted R3.97 billion.

The yield on the 2037 bonds fell nine basis points to 8.75%, a two-week low on a closing basis, by 2:24 p.m. in Johannesburg.

The rand strengthened 0.3% to 15.98 per dollar, on track for the lowest close since February 27.

Data last week showed South Africa’s inflation rate moderating, supporting demand for bonds, said Adriaan du Toit, the London-based head of EM sovereign research at AllianceBernstein.

Investors are also starting to look toward the mid-term budget due in October, which is expected to show an improvement in fiscal metrics.

“You also have the tailwind of the US dollar that’s been pushed onto the back foot,” Du Toit said.

The rand has gained 3.4% against the greenback this month, easing inflation pressures.