South Africa's rand firms, bonds recoup some losses

Fri Feb 24, 2012 5:05pm GMT

* Rand breaks above 7.64, 7.52 in sight

* Market still sees strong supply of local bonds

JOHANNESBURG Feb 24 (Reuters) - South Africa's rand touched two-week highs against a broadly weaker dollar on Friday and bonds reversed some of their recent losses, although continued scepticism that a lower budget deficit will cap supply should maintain pressure on local debt.

The yield on the 2015 bond closed 1.5 basis points lower at 6.66 percent while that for the 14-year issue dipped 2.5 basis points to 8.28 percent.

Government bonds have taken a knock as the market remains unconvinced that the National Treasury's forecast of a narrower budget deficit of 4.6 percent of GDP in the financial year ending March 2013 from 4.8 percent in 2011/12 implies a reduction in the overall supply of local debt.

"With a 76.9 billion rand ($10.13 billion) borrowing requirement for state-owned entities, it's highly likely that the companies will utilise the positive headlines from the national budget to step up their financing in the coming weeks," HSBC analyst Di Luo said.

"Therefore, the actual supply in the domestic bond market in the remaining first half of this year could easily overshoot 3 billion rand a week. The crowding out effect implies risk premium and volatility."

Fears of rising inflation as international crude prices climb above $124 a barrel are also expected to keep bonds under pressure.

The rand gained as much as one percent against the greenback to a session high of 7.58, its strongest level since Feb. 10.

By 1643 GMT the currency was trading at 7.5950/dollar, up 0.85 percent from Thursday's New York close of 7.66.

A close above 7.64 on Friday, a level the rand has struggled to break convincingly above over the past fortnight, could open up this year's high of 7.52. ($1 = 7.5926 South African rand) (Reporting by Stella Mapenzauswa; editing by Ron Askew)

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