South African bond yields continued their upward run on Wednesday morning as investors increasingly began to price in a local rate hike sooner rather than later.

At 8.45am‚ the benchmark R186 was bid at 8.300% and offered at 8.285% from a Tuesday close of 8.290%.

The middle-dated R207 was bid at 7.795% and offered at 7.780% from a previous close of 7.795%.

The Reserve Bank in its bi-annual monetary policy review report — released late on Tuesday — warned that interest rates would have to go up again‚ given the outlook for inflation in the coming months. Inflation is expected to peak at 6.8% in the first quarter of next year.

It said a “strong chance of a sustained breach” of the 3%-6% target band was possible due to the effect on domestic prices of the weak rand and looming electricity tariff increases‚ which the Bank expected to be above inflation.

Volatility in the bond market will continue this week‚ with US nonfarm payrolls data and a sovereign credit rating due on Friday.

While there is a significant chance that Fitch Ratings will downgrade SA’s rating on Friday‚ it is “marginally more likely than not” that the agency will affirm the rating‚ Barclays Africa economists said in a note.

Fitch rates SA’s sovereign credit rating at BBB with a negative outlook.

Downgrades are undesirable‚ particularly at a time when global interest rates are set to rise‚ as they raise the cost of borrowing for government.

Event risk for the day is minimum. The market is likely to take its direction from the rand.