(Bloomberg) -- The rand strengthened and local bond yields dropped after South Africa said it will tap its gold and foreign-exchange reserves to reduce the scale of its public debt sales. 

The currency advanced as much as 0.8% to 18.7622 per dollar by 2:35 p.m. in Johannesburg, after trading flat before the announcement was made. The yield on local bonds due February 2035 dropped 10 basis points from closing levels to 11.57%, while the benchmark stock index was slightly down for the day. Bank stocks, however, were rallying with the gauge climbing as much as 1.1%.

The decision to draw from the central bank will allow the government to decrease the amount of debt auctioned at its weekly sales. That provides some relief to local bond markets, which have come under pressure this year amid rising US Treasury yields and anxiety over the trajectory of South Africa’s finances.

South Africa Goes for Gold, Taps Reserves to Curb Runaway Debt

The National Treasury showed it would lower its gross borrowing requirement through a draw-down from the Gold and Foreign Exchange Contingency Reserve Account, according to the Budget Review published in Cape Town on Wednesday.

The account, which is managed by the central bank on behalf of the Treasury, holds about 500 billion rand ($26.6 billion) in unrealized profits incurred through changes in the value of the rand. From that, 150 billion rand will be used to pay down debt.

The profits in the GFECRA exist on paper unless they are realized by selling the underlying assets. Central bank Governor Lesetja Kganyago has warned that dipping into the nation’s reserves may leave the country more vulnerable to future exogenous shocks.

Can Of Worms

The market read this as a more positive outcome for debt because it appeared that spending was being constrained, said Robert Hoodless, co-head of FX and macro analysis at InTouch Capital Markets.

“The rand and local bonds understandably rallied on the outcome which was combined with a lower debt-to-GDP profile. But for the currency to continue appreciating in the long term, the optimism must be followed up with fiscal promise delivery,” said Hoodless.

“Many will likely be skeptical that debt can be kept down to a lower path over the next few years,” he said. “And while the opening of the GFECRA account to the admittedly lower tune of 150 billion rand is below many forecasts, this can of worms is now open for future raids depending on the political environment.”

(Updates market moves, adds investor comment)

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