May 19, 2004

Johannesburg - Government bonds plummeted yesterday, rattled by strong manufacturing data and central bank concerns over oil prices, which analysts said suggested an interest rate hike sooner rather than later.

Domestic industrial output rose by a seasonally adjusted 2.3 percent in the first quarter, after contracting 0.8 percent in the fourth quarter of last year, pointing to a manufacturing recovery after three consecutive quarterly declines.

Releasing the delayed data, Statistics SA said manufacturing sales over the whole of 2003 had been underestimated by 17 percent and the rate of economic growth for the year might also have been understated.

"It appears as though the higher manufacturing numbers imply that the rand is less overvalued than we thought and the underlying inflationary pressures may be higher than we thought," said Leon Myburgh, a bond analyst at Barclays.

"If that is the case, it may also mean that there should be pressure on the shorter-dated bonds because it increases the potential for a rate hike sooner [rather] than later."

The yield on the short-dated R194 faded to an intraday worst of 10.315 percent before retracing to 10.235 percent, about 9 basis points weaker on the day.

The yield on the benchmark R153 waned as far as 10.31 percent. By the close it had recovered to 10.235 percent, about 7.5 basis points worse than on Monday.

The debt market's woes were compounded by Reserve Bank governor Tito Mboweni's comments in London that high oil prices were starting to be a "cause of concern", given their possible impact on inflation.

However, he said domestic markets should not expect a knee-jerk hike in interest rates.

Analysts said the market was already pricing in a 100 basis point rise in interest rates by year-end, with the first hike expected around August.

The rand nudged firmer against the dollar in what traders said was an order-driven market, despite the euro's setback versus the dollar on signs of souring German economic sentiment.

At 5pm the dollar was bid at R6.77, compared with R6.84 at the open and R6.74 at Monday's close.

In early New York trade, the euro fell by 0.47 percent to $1.1959 and by 0.97 percent to ´136.13.

Traders predicted exporters and importers would keep the rand in a range of R6.70 to R6.90 to the dollar in the short term.