South Africa's government bond curve steepened again on Monday with the yield spread between shorter and longer-dated debt hitting a record high as dealers positioned ahead of a debt auction on Tuesday.
Equities gained slightly for the second day running, with gold stocks among the top gainers as the market consolidates after last week's sell-off.
The rand strengthened to a five week-high as sentiment towards the dollar turned negative on speculation that the Federal Reserve would not raise interest rates yet.
Longer-dated government bonds have been under pressure since the government gave a disappointing budget deficit forecast last week, as investors anticipate new borrowing to bridge the fiscal gap will be concentrated at the far end of the curve.
The yield spread between South Africa's 13.5 percent September 2015 bond and its 10.5 percent December 2026 bond rose to a record 120 basis points before easing to close at 118 bps. That compared with a previous peak distance between the two benchmarks of 117 bps, touched in July 2010.
The yield on the 2026 bond closed at 8.945 percent on the JSE, up from 8.91 percent on Friday while the 2015 issue was unchanged at 7.77 percent.
The South African finance ministry forecast last week that the budget deficit will be 5.3 percent of GDP for financial year 2011/12, more than markets had expected.
The National Treasury is also due to sell 1.1 billion rand of 2018 paper and 1 billion rand of 2021 bonds at its weekly debt auction on Tuesday, for which dealers are likely to have prepared by selling some longer-dated debt.
It's still the (Budget) overhang and we're also getting a bit of issuance coming though tomorrow (which) I think is also putting pressure on that back end, said Alvin Chawasema, bond dealer at Barnard Jacobs Mellet.
The rand firmed by 1.18 percent against the dollar to 6.9355 on Monday and was the highest gainer among a basket of 20 emerging market currencies watched by Reuters at 1600 GMT.
The dollar tested key support at the 6.95 area during the session, breaking through a January 20 low of 6.9502, which is also around the 50 percent retracement of its rise from January 3 this year. It also crossed its 100 day moving average at 6.96, having closed at 7.02 on Friday.
STOCKS CONSOLIDATE GAINS
The JSE Top-40 index of blue chips was up 0.95 percent to 29,077.83, while the broader All-share index gained 0.96 percent to 32,272.09.
I think the market has found some stability after the panic selling last week. So, just a bit of a consolidation period, said Wilmar Buys, a trader at FFO Securities.
Aspen Pharmacare was the biggest gainer among blue-chips, rising 2.52 percent to 81.50 rand, while Johannesburg-listed shares of British mall-owner Capital Shopping Centres gained 2.36 percent to 44.31 rand.
Bourse and mining heavyweight Anglo American was up 2.31 percent to 377 rand and rival miner BHP Billiton increased 1.39 percent to 277 rand.
Underpinned by firmer bullion prices lifted by safe-haven buying, gold stocks such as Gold Fields gained 2.28 percent to 124.79 rand and Harmony Gold increased 0.64 percent to 81.23 rand.
Nedbank, South Africa's fourth-largest bank, shed 0.17 percent to 127.80 rand after the group rose on Friday in anticipation of solid results posted on Monday.
Shares in Bidvest lost 0.63 percent to 156.01 rand, with one fund manager citing lacklustre sales growth in the South African industrial company's half-year results.