Rand and local bonds rally as inflation surprises to the downside

The rand and local bonds rallied by mid-morning on Wednesday, after inflation unexpectedly slowed in August, boosting the attractiveness of the local assets.

Inflation grew at a slower rate of 4.9% in August on a year-on-year basis, slowing from 5.1% in July, Stats SA said in a statement. The benign inflation figures could help take pressure off the Reserve Bank, whose monetary policy committee is scheduled to decide on interest rates on Thursday.

“The weaker-than-expected consumer price index (CPI) inflation outcome for August will alleviate the expected upward trajectory in CPI inflation for the rest of this year and into next year, thereby reducing the pressure somewhat on the [Reserve Bank] to hike interest rates this week, although, globally, interest rates remain in an upward cycle, particularly in [emerging markets],” Investec economist Annabel Bishop said in a note.

The yield on the benchmark R186 bond fell to 9.135%, from 9.205%. This compares favourably to government bond rates in the most of the developed countries, including Germany and Japan. The yield on the German 10-year bund stood at 0.4885%, while that of Japan stood at 0.1158%.

The rand has weakened substantially in recent months, limiting the potential for further falls — at least in the short-term.

“There is a reasonable chance that once the dust settles we could see a decent recovery in the emerging-market interest-rate markets,” said Ashley Dickinson, head of fixed-income dealing at Sasfin Wealth on Tuesday. “Investors could well look to rand bonds for a yield-enhancer once they have factored in the external components — trade conflicts and eurozone uncertainty — as local [factors] are pretty much a known and [already] in the price.”

At 11.09am, the rand was at R14.7046 to the dollar, from R14.8917. It was at R17.2029 to the euro from R17.3790, and at R19.3886 to the pound from R19.5817. The euro was at $1.1699 from $1.1670.