S.Africa bonds weaken on rates expectations, rand firm

JOHANNESBURG Feb 9 (Reuters) - South Africa's rand held firm against the dollar on Thursday but government bonds retreated as investors priced in the chance of interest rates rising by year-end, with most of the selling coming at the shorter end of the curve.

The yield on the three year benchmark added 2.5 basis points to 6.605 percent, its highest since Jan. 27, and that for the longer-dated 2026 issue rose 3.5 basis points to 8.265 percent.

"From our perspective the short end of the local curve was comparably a bit overbought in previous weeks and that bias has held for some time now, especially as we see rate hike expectations starting to gain some traction," ETM market analyst

Sean McCalgan said.

However, the selling was offset by continued demand from foreign investors attracted by higher yields on the local market relative to overseas rates.

"From what we've seen recently there's still been a positive impact from foreign investors. Certainly the portfolio flows data shows bonds inflows are still a lot more healthy than equity flows, even though the equity market has been rising quite steadily," McCalgan added.

The debt market is pricing in a chance that the central bank might start hiking rates from the last quarter of 2012 or early 2013 after keeping them steady for the past year.

By 0653 GMT the rand was up 0.14 percent at 7.5441 against the dollar, within sight of Tuesday's five-month high of 7.52.

It took its cue from the euro, the currency of South Africa's main trading partner, which hit a two-month high on hopes that Greece was inching closer to a debt bailout deal.

Concerns that Greece and other European countries might default dented risk sentiment last year, hitting emerging markets. The rand lost 23 percent against the dollar but has clawed back nearly 7 percent of its value this year. (Reporting by Stella Mapenzauswa; Editing by Ed Cropley)