Yields on South African debt extended lows to fresh records on Friday morning, supported by an interest rate cut in the previous session, while the rand weakened due to the bleak domestic and global economic outlooks.

The Reserve Bank surprised the market On Thursday by cutting its repo rate by 50 basis points to 5 percent. It also cut its growth and inflation forecasts.

The yield on the 2015 bond dropped to a record 5.32 percent, while the 2021 issue fell to 6.425 percent.

The rand was down 0.3 percent to 8.20 at 0650 GMT, off a 8.1750 close in New York on Thursday.

Analysts say closes above the 8.20 level will signal convincing rand weakness.

“Yesterday's monetary accommodation could encourage foreign bondholders due to the capital appreciation gains they would have enjoyed as result of yesterday's rate cut,” Absa Capital said in a note.

“Especially if they believe that yesterday's monetary accommodation is unlikely to be a one-off affair.”

The dovish inflation tone could also result in less demand for inflation-linked bonds as investors see less need to hedge against rising inflation.

Yields are likely to head lower in line with the nominal bond yields.

Treasury is selling a total of 800 million rand ($97.74 million) of its three new inflation-linked I2025, I2050 and I2038 bonds on Friday.

Investors are buying the front end of the yield curve in reaction to the rate cut. However if the market prices in more rate cuts this year, money could also go into the long end, adding to offshore players already piling into that space.

The money market has started to price in another cut this year, with 3x6-month forward rate agreements moving to 4.80 percent, suggesting a 40 percent chance of another 50 basis point cut by the end of the year. -Reuters