Filomena Scalise

South African government bonds rallied on Wednesday and yields wilted to all-time lows after consumer inflation data surprised to the downside, backing the case for the Reserve Bank to cut domestic interest rates later this year.

The rand hovered near its overnight closing levels, coming off earlier five-week highs as lingering uncertainty over Europe's debt problems keeps investors jittery.

The yield on the three-year paper fell 8 basis points on the day to 5.97 percent while that for the 14-year bond was down 6.5 basis points at 7.96 percent.

“Continued support from offshore buyers for South African bonds, which looks like will be around until October, coupled with inflation surprising to the downside today has given bonds a bidding tone,” said Steve Arnold, a bond trader at Investec.

Consumer inflation slowed more than expected in May, coming back into the central bank's 3-6 percent target range at 5.7 percent year-on-year and raising expectations the central bank may have room to cut interest rates further from current three decade lows.

Foreigners have also been steadily accumulating local debt in readiness for South Africa's inclusion in Citigroup's World Government Bond Index from October.

Analysts say the inclusion could result in portfolio inflows of up to 9 billion rand ($1.1 billion).

The rand touched a new five-week high of 8.1702 against the greenback but later lost some steam to trade at 8.19 by 17:20 SA time, little changed from Tuesday's close at 8.20.

Markets were focused on the US Federal Reserve's policy meeting later, with expectations high of further easing to breathe life into the world's largest economy.

“The market has been pricing in a very good chance of some form of easing coming from the Fed and if they disappoint you could find a risk-off scenario tomorrow, meaning a weaker rand and weaker bonds,” Arnold said. - Reuters