By Bloomberg

Johannesburg - Bonds gained for a third day on speculation the central bank will cut its benchmark interest rate next month.

The R150 rallied 6 basis points to 8.95 percent and the R153 strengthened 4 basis points to 9.26 percent yesterday.

The SA Reserve Bank cut its repo rate last month for the first time in two years, citing slowing inflation. A government report due next week might add to evidence that inflation was set to slow to within the target range, giving the central bank room to cut rates again next month, analysts said.

"The market is looking ahead to next week's economic data, which will probably be supportive of more rate cuts," said Adriaan Mocke, a bond analyst at Cape Town-based Investec Bank. "Next month's cut is in the bag."

Investec expected the central bank to cut the repo rate by 1 percentage point in August and another percentage point in October or December, Mocke said.

Expectations of falling short-term interest rates lure investors to the fixed interest payments of bonds, boosting prices of the securities.

Annual consumer inflation probably slowed to 6.7 percent in June, from 8.5 percent in May, according to economists surveyed by Bloomberg News.

The central bank's target range is 3 percent to 6 percent. The figures are due to be published on July 29.

Comments by Ian Plenderleith, the deputy government of the Reserve Bank, fuelled expectations of further interest rate cuts, Mocke said. Plenderleith said annual inflation would slow to less than 6 percent by September, the City Press newspaper reported at the weekend.

The central bank's monetary policy committee meets on August 13 and 14. Money market rates indicate some market participants expect a cut of more than 1 percentage point when central bankers meet next month.

A three-month forward rate agreement for delivery after the committee meets pays 10.5 percent interest, or 1.5 percentage point less than the repo rate. The rate has dropped from 10.8 percent a week ago.

The stronger rand also boosted bonds, Mocke said.

The rand added 4.38c against the dollar yesterday to be bid late at R7.6462 late in the afternoon.

It has gained 12 percent against the dollar this year and 3.1 percent in the past month, adding to returns on local debt for dollar investors.

The government bonds maturing in seven to 10 years have earned dollar investors 26.2 percent this year, the best performance out of 154 indices.

But the rand, which had its biggest five-day drop in two months last week, might weaken in coming weeks as evidence mounted the US economic recovery was gathering pace, attracting investors to dollar assets, analysts said.

"If the tentative signs of the US recovery are consistently confirmed by economic data over the next six months, the past week's setback for the rand may be a sign of things to come," said Standard Bank in a report.