Bonds weaker as market eyes US Fed meeting on Wednesday

South African bonds were weaker on Monday afternoon as the market awaited further guidance from the US Federal Reserve meeting on Wednesday.

The market was following a slightly weaker rand as UK and US yields rose amid indications the Fed might adopt a slightly more hawkish stance.

No change in US rates is expected but the Fed could provide more information on the planned reduction of the Fed’s huge balance sheet, built up after the 2008 financial crisis to increase liquidity and confidence in the markets.

The local market has been supported by foreign buying up to now following the Reserve Bank’s unexpected decision last week to lower the repo rate from 7% to 6.75%.

“Our long-bond yields of around 8.5% were still attractive relative to expected inflation, and more so if further rate cuts are forthcoming,” said Old Mutual Multi-Managers analyst Dave Mohr.

Mohr said in a global context South African yields were still among the highest of major emerging-market economies.

At 3.34pm the R186 was bid at 8.545% from 8.5% and the R207 was at 7.315% from 7.27%.

Although the Fed is on course to gradually increase rates this year, the market has priced in only a 40% probability of a third increase this year against the background of subdued consumer inflation in the US.

The Fed expected to hike rates three times this year on a predicted inflation level of 2%. But inflation has stabilised at 1.5% so far with the Fed funds rate at 1.25% from the higher 3% envisaged in June 2015.

The US 10-year bond yield was at 2.2467% from 2.2405%. The UK 10-year gilt was at 1.1787% from 1.1726%.

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