Filomena Scalise

Johannesburg - Surging prices for vodka, bread and green beans are a winning mix for inflation-protected bonds, which are set to extend the longest decline in auction yields in more than two years.

Yields on inflation-linked bonds have dropped for the past eight sales, the longest run since a similar streak to January 2012.

The South African debt made 2.3 percent in April, the third consecutive monthly gain, and compares with a 1.6 percent return for Brazil, Bank of America Merrill Lynch indices show.

With prices for alcoholic spirits jumping 7.1 percent and vegetables almost 13 percent, the consumer inflation rate in March climbed to the top end of the central bank’s 3 percent to 6 percent target range, keeping pressure on governor Gill Marcus to raise interest rates.

Because of this, investor appetite at Friday’s sale should have been strong, said Sean McCalgan at ETM Analytics.

The National Treasury sold R800 million of inflation-linked bonds due in January 2025, January 2038 and December 2050 on Friday, with demand for the notes exceeding R1.3 billion.

The average yield for all maturities at the auction declined 1 basis point from two weeks earlier, said the central bank.

Inflation would average 6.3 percent this year and peak at 6.6 percent in the fourth quarter, Marcus said on March 27, when policymakers left the benchmark rate at 5.5 percent.

The bank forecasts inflation will exceed the target band in the 12 months to the second quarter of 2015.

The price of bread and cereals rose 9.2 percent in March from a year earlier, Statistics SA said last week.

The core inflation rate, which excludes the prices of food, non-alcoholic beverages, petrol and energy, rose for the first time since September to 5.5 percent, the highest level in more than four years.

A weaker rand has driven up food and fuel costs. Petrol prices increased 9.5 percent over the past year to R14.32 a litre as the rand slumped 14 percent against the dollar.

The country relies on imports for 70 percent of its oil needs.

The price of yellow maize reached a record R3 850 a ton on March 11, up 66 percent from a year earlier.

The white variety rose 61 percent in the period.

Factories are boosting prices, adding to pressure on inflation.

The cost of final manufactured goods rose 8.2 percent in March from a year earlier, the statistics office said on Thursday.

The difference in yield between five-year fixed-rate bonds and index-linked debt, a measure of investor inflation expectations, rose 8 basis points to 6.71 percentage points this month, the first monthly gain in three.

The break-even rate for Brazil, which is rated one level lower at Standard & Poor’s, fell 14 basis points in the period.

Marcus said on April 8 that the central bank’s “accommodative” policy stance could not be maintained indefinitely.

The yield on South Africa’s inflation-linked bond due in January 2025 was unchanged at 1.6 percent on Thursday.

With inflation projected to breach the upper end of the central bank’s target, investors would try to hedge their holdings.

Fixed-interest debt was likely to lose out to inflation-linked bonds, or linkers, as interest rates increased, said Thando Vokwana, a trader at Rand Merchant Bank.

“If there’s a choice between the two, some of the risks that are very apparent on the nominal side are being offloaded onto the linkers, so you’re generally finding this trend of good support for the linker auctions,” Vokwana said. – Rene Vollgraaff and Jaco Visser from Bloomberg