Bonds strengthen as Fed holds the line

THE RAND dropped against a rallying dollar yesterday, but bonds gained for a third day.

At 5pm in Johannesburg, the rand was bid at R9.9636 to the dollar, 5.17c weaker than the same time on Wednesday.

Bonds gained after the Federal Reserve said it would maintain its monthly bond purchases. The Fed on Wednesday pledged to keep buying $85 billion (R840bn) in bonds every month, even after US growth beat estimates in the second quarter.

Bonds pared their gains after unemployment claims in the US dropped to their lowest level in more than five years. South Africa’s purchasing managers’ index rose to a fivemonth high in July, extending a rebound in manufacturing.

“Overall, if you look at the historical trend, US growth is still weak,” Sean McCalgan, the head of real-time research at ETM Analytics, said.

“That wouldn’t justify a large change in policy from the Fed. That will be important for the local bond market.”

Foreign investors bought a net R384 million of South African bonds on Wednesday, bringing net inflows for July to R8.68bn, according to JSE data.

European Central Bank president Mario Draghi said recent economic indicators signalled that the euro region was through the worst and he reiterated officials’ plan to keep interest rates low for the foreseeable future.