Filomena Scalise

Johannesburg - Yields were sharply lower as South Africa's government bonds rallied on Wednesday, with investors seeing bargains in the local debt market after the previous day's heavy sell-off.

The rand gained as much as 1.3 percent against the dollar before retreating later in the session and traders said nagging worries about euro zone debt problems were likely to cap any significant gains.

The yield for the three-year bond which trades heavily on the secondary market closed 9.5 basis points lower at 5.39 percent while that for the 14-year paper fell 14.5 basis points to 7.335 percent.

Demand was picking up again following a brief correction after last week's unexpected 50 basis point cut in the benchmark repo rate by the Reserve Bank's monetary policy committee (MPC) pushed yields to record lows, traders said.

“They (bonds) present value again. We've seen a huge retracement in bond yields since the MPC - the market was nearly half a percent up at one stage this morning from the low after MPC last week,” said Ian Scott, a portfolio manager at Stanlib.

“Spanish yields have come off their highs a little bit and we also saw the euro strengthen today. This all helps the local bond market, but how long it will last we don't know - it's a typical risk-on, risk-off scenario.”

The rand was trading at 8.4567 against the greenback by 16h18 GMT - off a session high of 8.4080 but up 0.74 percent from Tuesday's closing level of 8.52.

“It's really euro dependent at the moment,” said Rand Merchant Bank trader Jim Bryson, alluding to the rand's tendency to track the common currency mainly because of South Africa's close trading links with the euro zone.

“If we can get some more traction on the euro, the rand stays in ranges but the danger is still the downside for the euro.”

The rand has taken a pounding against the dollar this year, hitting a three year low of 8.71/dollar in early June as the euro zone debt crisis spawned aversion to emerging market assets perceived as carrying higher risks for investors. - Reuters