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Bonds show disappointment at interest rate decision

Bonds show disappointment at interest rate decision < News < Bet On Markets

Johannesburg — The rand gained 1.75c against the dollar yesterday after the central bank decided to keep interest rates unchanged, leaving the unit’s high-yield appeal intact, analysts said.

But government bond yields trended softer amid disappointment with the monetary policy committee’s decision to leave the repo rate steady at 7.5 percent.

Traders said some market participants had been expecting a 50 basis points cut.

Government bond yields rose after earlier dropping sharply in anticipation of a rate cut.

The yield on the R153 initially fell to 7.95 percent, a record best, in the middle of Reserve Bank governor Tito Mboweni’s televised address, before quickly reversing after the rate verdict.

«There was a bit of a disappointment that it [the rate cut] did not happen,» said Nyiko Mageza, an analyst at Absa.

«The rand has started recovering again and if it goes towards R5.50 a dollar we expect that central bank will be forced to cut rates next year.»

By 5pm the yield on the R153 was unchanged on the day at 8.125 percent bid. The yield on the R194 had weakened 6.5 basis points to 7.86 percent.

The rand firmed to an intraday best of R5.82 a dollar shortly after the interest rate announcement. At 5pm it was bid at R5.8125, stronger than R5.83 at the same time on Wednesday.

«The rand’s strength is to be expected, given that the carry trade has not been eroded further,» said Michael Keenan, an analyst at ETM.

«Clearly, there were some market participants who were hoping for another rate cut, hence the correction in both the rand and the bond markets.»

He went on to say: «Now that the interest rate implications are out of the way, the rand will continue focusing on offshore developments.»

The dollar gained ground against major currencies for a second session as investors took profits on bets against the ailing currency. But at 5pm the euro was little changed at $1.3268.

Analysts said the rate decision would stop the rand from weakening significantly in the event of an extended dollar recovery.

«Today’s decision emphasises that the economy may have entered into a new phase of stable prices, which will require a more stable policy than was seen in the past,» said Keenan.

«This may be a signal that the interest rate trajectories will be flatter from now on.»

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