Rand plummets, bond yields rise as South Africa’s finances deteriorate

South Africa’s rand weakened to a three-month low against the dollar, and yields on benchmark government bonds hit record highs amid a selloff fueled by concern about the country’s fiscal outlook as well as the risk-off mood globally.

The rand fell for a fourth day on Thursday, its longest streak in six weeks, to its weakest level since June against the dollar at around 19.20.

Yields rose all along the curve, with those on 2035 securities climbing above 12.5% for the first time. It could be worse without the support of the highest central bank policy rate in 14 years, according to Citigroup Inc.

“Rand lovers — if any — should be glad the South African Reserve Bank is probably going to be one of the last central banks to cut rates in this cycle,” Citigroup analysts Luis Costa and Bhumika Gupta wrote in a note to clients.

“Without a cautious SARB, ZAR could be far above 20.”

The Reserve Bank left its benchmark rate unchanged last week, but hawkish comments from Governor Lesetja Kganyago prompted money markets to price in 42 basis points of increases over the next two meetings.

Rising US Treasury yields and a resurgent dollar have hurt riskier assets worldwide, as a surge in oil prices stoke expectations of higher-for-longer interest rates in the world’s largest economy. 

Locally, investors are concerned about holes in the nation’s budget, which the central bank said will force local rates to remain elevated for some time to come.

Yields on 2035 notes rose 18 basis points Thursday to trade at 12.59%, the weakest performance outside of Hungary on Thursday out of the 26 local markets monitored by Bloomberg.

The government bond market saw net outflows of R5.1 billion ($266 million) on Wednesday, the most in a day since July 22. 

“Rand bulls continue to struggle,” analysts at Rand Merchant Bank wrote in a note to clients. “The local bond market remains topside-yield-focused, with US Treasury yields hitting fresh highs, a weaker rand and concerns about SA Inc.’s fiscal position all providing the fuel for short positions.”


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