London - South African local bond yields rose to the highest in six weeks on Wednesday on anticipation of rate hikes and a ratings downgrade, while the rand led a general emerging currency pullback versus the dollar.
Swaps markets indicate that investors are pricing roughly 100 basis points of policy tightening in South Africa over the coming year following a hawkish speech by central bank governor Gill Marcus.
That has pushed up bond yields across the curve with two-year yields up 30 basis points this week.
Foreigners sold $55.64 million worth of bonds on Tuesday, pressuring the rand which slipped 0.8 percent to the dollar to one week lows.
Fears of a ratings cut this Friday are also pushing up debt insurance costs - 5-year credit default swaps rose 3 bps to 182, up almost 20 bps since last week.
Spreading labour unrest in the mining sector, weak growth, and high inflation make South Africa more vulnerable than other emerging markets to the rise US yields and the dollar.
David Hauner, head of EEMEA fixed income and economics at Bank of America Merrill Lynch, said South African losses were being limited by the hunger for carry, given it offers some of the highest yields in emerging markets at over 8 percent.
“The rand will remain an underperformer. (The) bond market is part of my concern, that we are setting up for more volatility because of complacency and people's hunt for yield,” he said.
He said the trade balance - and current account gap - could worsen in coming months as inventories of platinum, which the country is drawing on for exports, get depleted.
Elsewhere, the Turkish lira fell 0.5 percent while earlier in Asia, the yuan slipped back after three days of gains and most currencies fell as investors scrambled to cover short dollar positions.
The dollar is close to a four-month high to the euro while 10-year yields are at their highest since end-April.
Emerging stocks fell 0.15 percent, easing from one-year highs showing little reaction to MSCI's decision to keep Chinese local shares out of its emerging markets index and to not re-classify South Korea and Taiwan as developed markets.
In emerging Europe, Hungary's forint slumped to a one-week low versus the euro as data showed prices in negative territory for the second straight month, but bond yields showed little reaction after falling to record lows in recent weeks.
Versus the dollar, the forint hit two-month lows
Hungarian stocks fell 1 percent after the data
“Absent headline inflation will support further monetary easing ... Another 10 bp cut, reducing the main rate to 2.30 percent later this month, looks certain,” BNP Paribas said.
Other regional currencies also weakened, with the zloty down 0.2 percent and the leu falling 0.3 percent.
BofA's Hauner attributed this to rate cut expectations.
“Central banks are increasingly telegraphing they don't want currency strength. Secondly, everyone had piled in before the ECB announcement so positioning was already extended and third, these currencies have a high beta to euro-dollar. As that goes lower, you get euro/zloty reacting too,” he added.
Russian assets were broadly stable as Moscow gave Ukraine more time to meet gas payment demands.
But there were signs more Russian borrowers could venture back to bond markets, with sources telling Reuters that state-run Sberbank had appointed banks to raise up to 1 billion euros.
Alfa Bank last week sold a euro-denominated bond, the first Russian borrower to do so in months.
Also on bond markets, Iraqi dollar debt spreads widened 23 bps on JPMorgan's EMBI Global index after al Qaeda linked Islamists took over the country's second city, Mosul, raising fears of the country would start to break up. - Reuters