South African bonds were firmer in early morning trade on Thursday after the US Federal Reserve increased interest rates by 25 basis points as expected but indicated it would take a more hawkish stance for the rest of the year.
The Fed statement pointed to another rate increase in 2017 and three additional 25 basis point increases in 2018 as the central bank remained committed to a "neutral" interest rate of 3%. A neutral rate implies no negative effect on growth.
However‚ markets did not respond as expected to the Fed’s hawkish stance‚ with the rand firming and US treasuries weakening even as the Fed remains positive on a higher consumer inflation trajectory‚ which is not supported by actual data.
The Fed has not reached its 2% core inflation target over the past four years‚ with monthly consumer inflation released on Wednesday again weaker than expected.
"Traders appear unconvinced by the possibility of another US rate hike this year‚ despite what the Fed indicated‚ with the implied probability of one by December standing at below 50%‚" said Oanda analyst Craig Erlam.
He said investors appeared to be concerned about the slowing pace of US inflation but this did not seem to bother Fed policy makers‚ who revised down their projection for 2017 to 1.6%‚ from 1.9% previously‚ while maintaining their forecasts of 2% for 2018 and 2019.
The market was eyeing the decision on rates by the Bank of England (BoE)‚ with no change expected. The forward view in the statement may indicate when the BoE intends to increase rates against a background of higher consumer inflation‚ subdued growth and political instability in the UK.
At 9.09am the bid on the R186 was at 8.37% from 8.39% and the R207 was at 7.36% from 7.37%.
The rand was at R12.6819 from R12.6835 after reaching R12.5910 in earlier trade.
US treasuries continued on the firmer path evident before the Fed meeting‚ with the yield on the 10-year bond at 2.1309% from 2.2120%.
The UK 10-year gilt was at 0.9522% from 0.9291%.
-BusinessLIVE
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