S.Africa's bonds gain after PMI, rand softens vs dlr
* Rand near three-week highs
* Bonds gain after PMI points to manfacturing fall
* Stocks ends in positive territory
By Phumza Macanda and Helen Nyambura
JOHANNESBURG, Sept 1 (Reuters) - South Africa's bonds firmed across the curve on Thursday after PMI data showed the manufacturing sector contracted for the second month in August, supporting the case for accommodative monetary policy.
The rand softened to the dollar after its gains to three-week highs below 7.00/dollar attracted importers to buy dollars.
Stocks ended in positive territory after starting off on the back foot and investors will be watching U.S. non-farm payrolls on Friday for direction.
South Africa's Purchasing Managers' Index rose to 46.7 in August, still showing contraction and suggesting that the manufacturing sector -- the second-biggest contributor to gross domestic product -- was sluggish in the third quarter.
The Reserve Bank has left the repo rate flat at 5.5 percent this year, after cutting by 650 basis points in the two years to the end of 2010.
The yield on the 2015 benchmark fell 9.5 basis points to 6.42 percent and that on the 2026 note fell eight basis points to 8.03 percent.
The market is pricing in a 50 percent chance of a rate cut, a turn-around from two months ago when a rate hike by year end was seen as a possibility.
"Even if the market is ahead of itself in discounting a rate cut, the fact is that if there is a long period of sustained rates, demand for bonds will remain," said Ion de Vleeschauwer, chief dealer at Bidvest.
"6.4 percent on the 2015 benchmark is pretty good yield so although bonds are expensive those yields are attractive."
Yields have fallen by 50-70 basis points since the beginning of August, with a ratings downgrade of U.S. debt raising the threat of another recession.
The rand hit a three-week high of 6.9656 Thursday, but came back as those levels attracted dollar buyers.
By 1531 GMT, it was trading at 7.0150 to the dollar, 0.4 percent weaker than Wednesday's New York close of 6.9865.
It was at three-week highs against other currencies such as the euro and sterling as well.
The rand will have to end the week below 7.00 to signal further gains.
WATCHING U.S. PAYROLLS
The JSE blue-chip Top-40 index was 0.26 percent stronger at 27,753.42, while the broader All-Share index added 0.27 percent to 31,088.12.
"There was a bit of profit taking in the morning then a complete 180 as the day progressed," said Mitchell Gannaway, a trader at Thebe Stockbroking.
"The important thing for the market will be tomorrow, U.S. non-farm payrolls, a lot of people will be waiting for that eagerly to see what happens there."
Bidvest , a conglomerate with businesses ranging from auto retailing and shipping to food distribution, added 3.9 percent to 163.01 rand, making it the biggest blue-chip gainer.
Diversified miner African Rainbow Minerals on the other hand lost 2.7 percent to 184.89 rand on profit taking, after rallying in the previous session.
Discovery Holdings , South Africa's largest health insurer, rose 2.6 percent to 39.25 rand after posting strong annual profits.
Alexander Forbes ended 2.6 percent higher at 7.80 rand after a subsidiary of Marsh & McLennan said it would be acquiring its risk business for 809 million rand. (Editing by Ruth Pitchford)