Long-term South African government bonds continued to fall on Thursday in anticipation of supply to fund the budget deficit, while the rand climbed and stocks closed moderately lower.

Finance Minister Pravin Gordhan's forecast on Wednesday of a much bigger-than-expected deficit for next fiscal year steepened the bond curve. The government now expects to issue 135 billion rand of domestic bonds in 2011/12, down from 139 billion rand in the current year, but next year's issuance will still be about 6 billion rand more than the market had been expecting based on last October's medium-term budget plan.

The yield spread between the 2015 government bond and the 2026 bond rose as high as 120 basis points on Thursday afternoon, exceeding the previous lifetime peak of 117 bps reached last July, before finishing at 117 bps. At Tuesday's close, before the budget forecast was issued, the spread was at 100 bps.

I think the main driver of this spread is the extra anticipated issuance produced from the budget...coupled with the aggressive move on the oil price, and it's just been a perfect recipe to see the 186/157 go all the way up to 120 bps, said Trevor Barsdorf, analyst at ETM.

I would say the main shock was that the budget deficit figure didn't fall, so government needs to borrow more money; they're gonna borrow it from the longer end of the curve and that's why your R186/R157 spread has sold off so aggressively.

Some traders said they were surprised by the rapid rise of the spread, however, and did not expect a sharp expansion beyond 117 bps for any extended period -- especially if the rand stayed firm, helping to attract foreign investors into bonds at the higher yields seen toward the long end.

RAND

In Wednesday's Budget speech, Gordhan refrained from fresh measures to curb rand appreciation and he did not express concern after moderate rand strength. So while the rand fell in early trade on Thursday in line with emerging market currencies worldwide, it quickly rebounded when the global trend improved.

The comments that Gordhan made around the currency, suggesting that too much rand weakness is not desired -- the market has seen that as an indication that perhaps authorities will be intervening less. That's been supporting the rand, and overall we've had a little bit of dollar weakness anyway, said Imran Ahmad, emerging market strategist at RBS.

The rand traded late in the day at 7.06 to the dollar, 0.84 percent firmer than its previous close of 7.12. It touched a session high of 7.0499, a level last seen in late January.

The 7.04 level is technical support for the dollar because it is the 38.2 percent retracement of the dollar's rise this year; it was approached and held on Wednesday. Any clean break (a daily close) would point down to the 50 percent retracement at 6.95, which is stronger support because it roughly coincides with the 100-day average.

STOCKS

Stocks extended their losses, echoing losses around emerging markets and Europe as the Libyan crisis drove Brent crude oil higher.

The JSE Top-40 index of blue chips was down 0.6 percent to 28,571.23, while the broader All-share index shed 0.71 percent to 31,706.47. The Top-40 fell for the third straight day but in contrast to previous days, ended well off its lows.

The oil price is still a bit nerve-racking. There are a lot of (investors) who want to get out and sit on the sidelines to see what direction the market is going, said Rigardt Maartens, a portfolio manager at PSG Online Securities.

Brent crude oil prices shot close to $120 per barrel, their highest level since the peak of the financial crisis in autumn 2008, fanning further concerns about its impact on inflation and global growth.

On the JSE, shares in the world's biggest maker of vehicle fuels from coal, Sasol, rose 1.99 percent to 381.25 rand.

Anglo Platinum dropped 2.90 percent to 670 rand and Impala Platinum was down 2.76 percent to 204 rand.

Massmart shed 2.68 percent to 141.10 rand after the South African retailer forecast a tough second half.

Johannesburg-listed shares of British American Tobacco lost 2.70 percent to 272.92 rand as investors fret over declining cigarette volumes.

Emerging markets Crude oil Down