South African government bonds sharply extended losses on Friday, a day after the central bank left interest rates unchanged and hinted it might have ended a cutting cycle as inflationary pressures rise.
The yield on the benchmark 2015 bond hit 7.885 percent, surging 20.5 basis points on Thursday's close and reaching its highest level since early June 2010.
The yield on the longer-dated 2026 note rose to as high 8.825 percent, up 17 basis points on the day.
The Reserve Bank left rates unchanged and the market feels that they are now looking ahead and seeing higher inflation levels than earlier thought. It looks like there will not be any more cutting, a bond trader in Johannesburg said.
Reserve Bank Governor Gill Marcus's comments about monetary policy remaining stable for some time also showed in the forward rate agreement market, which suggested interest rates may rise 50 basis points to 6 percent in a year.
Already stressed by the sharp rand sell-off of the past few days, 9x12's now look to be fully pricing in a 50 basis point rate hike, Absa Capital said.
Earlier, traders said that although it was expected by the market, the rate announcement disappointed some foreign investors who had still been holding out for a cut.
As a result, a sell-off in local bonds could continue for a while, they said.
Prospects of large portfolio outflows from South Africa have weighed on the rand, which slumped to a near-8 week low of 7.14 to the dollar, approaching the key 7.15 level which should offer support for the currency.