Bonds extend budget losses, rand weaker

Johannesburg - Longer-dated South African government bonds extended losses in early Thursday trade from three-month lows in the previous session, as they continued to be affected by the Finance Ministry's disappointing budget deficit forecast.

Meanwhile the rand reversed its post-budget gains, weakening against the dollar as the market's focus turned back to general softness in emerging markets because of the political unrest in Libya and higher oil prices.

South African PPI inflation data for January, due at 09:30 GMT, is expected to have eased to 5.4% year-on-year from 5.8%, but accelerated to 0.8% on a monthly basis from 0.3% previously.

Traders said the bond market was not panicking about the budget forecast but the market did not completely trust the government's assurance that more domestic debt supply was not on the cards. So there was selling particularly in the long end of the curve, where new supply would probably be delivered

"Predictably, the longer end has underperformed relative to the shorter end with the R186/R157 currently quoted at 106 basis points," Tradition Analytics said in a note.

"Expect this spread to push even higher, especially should oil prices surge further and growth expectations deteriorate further, raising the possibility that NT (National Treasury) will borrow more heavily."

The yield on benchmark 2015 government paper R157 barely moved, rising to 7.855% from a close of 7.7850%, but the yield on the 2026 bond R186 climbed to 8.955% from 8.865%.

The rand was 0.28% weaker at R7.1376 to the dollar, compared with a close of R7.1200 on Wednesday. Dealers expect the currency to trade in a R7.06/18 range in the day.

The rand surged on Wednesday after the Budget contained no further steps to curb currency strength, and after the central bank governor said she was not targeting any specific rand level, which the market viewed as a signal that authorities would tolerate moderate strength.