South Africa's rand steadied against the rand on Tuesday and government bonds edged higher as tentative calm returned to the market although local assets are still vulnerable to contagion fears over Greece's heavy debt burden.

Government bonds closed slightly firmer in Johannesburg trade after a weekly debt auction which pointed to slightly improved demand for local debt following a heavy sell-off in September during a global flight from risk.

The rand was still within 20-cents sight of September 28-month low of 8.4950 to the greenback, when worries about a default in Greece triggered an emerging market rout, but should stabilise around current levels barring any new external shocks, analysts said.

The currency was at 8.2550 to the dollar by 1638 GMT, off a session low of 8.3528 and 0.42 percent firmer than Monday's close at 8.29.

I think we have reached a kind of cap for dollar-rand given the levels that we are trading and have traded and the depreciation that we had in the past month which I think was a bit overdone, said Murat Toprak, an EMEA strategist at HSBC in London, adding however the rand was unlikely to stage a meaningful recovery.

The markets has is pricing in weaker growth for Africa's largest economy which should keep interest rates at 30-year lows for a while and Finance Minister Pravin Gordhan's comments on Monday that earlier forecasts of 4 percent annual expansion over the next 3 years were too ambitious did not unduly surprise players.

For dollar rand to spike above 8.50 and to 9.00 would need another big external shock. If things stabilise as they are at the moment and we don't have another big external shock that's very good reason to think we probably seen (the worst) for now, Toprak said.

Government bonds edged firmer on Tuesday, pushing the yield on the four-year issue three basis points lower to 6.96 percent and that for the 2026 paper down a basis point to 8.63 percent.

In a note to clients, Citi said provisional September financial data published on Tuesday pointed to a larger-than expected budget deficit for the current financial year which might necessitate increased debt issuance, a negative for the bond market.