July 29, 2004

Johannesburg - Government bonds surged yesterday, buoyed by a slower-than-expected increase in June consumer inflation, which analysts said suggested that interest rates might not be increased this year.

Statistics SA said CPIX - the consumer price index excluding mortgage rates, which is targeted by the Reserve Bank for monetary policy - rose by 5 percent in the year to June from 4.4 percent in May, and against market expectations of a 5.4 percent jump.

With that, yields on the benchmark R153 bond dived 15 basis points to a session low of 9.69 percent and the R194 bond plunged 23 basis points to 9.37 percent.

"[The CPIX is] a very positive number. It supports the continuingly improving inflation outlook," said Leon Myburgh, a fixed income analyst at Barclays.

"[It is] very supportive for the bond market, and confirms there is value for bonds in the medium term. It also confirms our long-held view that interest rates are likely to be unchanged for the foreseeable future."

Analysts said that although the market was pricing in between 100 and 150 basis points worth of rate hikes over the next 24 months, prospects of monetary policy tightening for the rest of this year were fading.

"It's changing gradually, which means we are quite bullish on bonds. It's increasingly looking like the Reserve Bank might not hike rates this year," said a bond analyst at a major local bank.

At the close the R153 bond was bid at 9.76 percent compared with 9.84 percent at Tuesday's close.

The R194 paper strengthened to 9.41 percent from 9.6 percent.

The firmer bond market tone spilled over to the rand, helping the unit hold gains beneath the key R6.35 a dollar level, after Tuesday's drubbing on the back of a stronger-than-expected US consumer confidence report.

The rand was trading at R6.2724 to the dollar compared with R6.3175 at the close on Tuesday. It had briefly firmed to R6.26.

Traders said the unit had also received a boost from the dollar's slight retreat, following a weaker-than-expected report on US durable goods in June.

By early morning in New York, the euro traded virtually flat at $1.2057 against the dollar after touching a six-week low at $1.2009 earlier in the global day.

The dollar strode to multi-week highs against other major currencies this week, pulling the rand further away from a five-and-a-half-year peak of R5.87 to the dollar scaled last Monday.