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JOHANNESBURG, May 11 (Reuters) - South Africa's sale of inflation-linked bonds flopped on Friday for the second week running, but dealers said demand should pick up in the weeks ahead as the relatively illiquid instruments catch up with a sharp sell-off by their nominal counterparts.
Treasury offered 800 million rand ($100 million) in three inflation-linked bonds, but only received and sold 105 million rand of paper - the worst auction in eight months.
The few bids received were allocated in full at slightly higher yields.
Last week's sale managed 390 million rand out of the 800 million on offer.
Last week's auction flop caused temporary consternation because of its rarity value, although dealers said it now seemed to be little more than a reaction to a sharp sell-off in nominal bonds.
Yields on benchmark nominal bonds shot up 12-21 basis points this week, causing many domestic investors - the main buyers of inflation-linked instruments - to shun what they see as now expensive inflation-linkers.
"You can't have nominals sell off that much and linkers not follow," said Malcolm Charles, a fixed income portfolio manager at Investec.
The 2028 inflation-linked issue, which started the week at 2.22 percent, was trading at 2.24 percent at 1243 GMT and hit a clearing level at the auction of 2.3 percent.
"It has now moved 8 basis points over the week so it's slowly catching up," Charles said. "It will slowly reprice and I would guess it moves another 10 basis points and you'll see buyers come back in again." ($1 = 8.0105 South African rand) (Reporting by Xola Potelwa; Editing by Ed Cropley)