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JOHANNESBURG, April 2 (Reuters) - South Africa's rand edged higher against the dollar on Monday, after bullish China data boosted risk appetite, and government bonds rose, although demand for local debt could weaken if inflation data starts pointing to interest rate rises.
The rand traded 0.37 percent firmer at 7.6290 to the dollar at 1606 GMT after closing at 7.6570 last week, as upbeat Chinese factory data boosted the global economic outlook and supported demand for riskier emerging market assets.
The yield on the three-year benchmark bond closed 2.5 basis points lower at 6.675 percent and the yield on 14-year paper shed three basis points to 8.35 percent.
"Nothing much has happened today - I haven't seen big-ticket trading going through but the rand could have been a major contributor (to bond gains)," Alvin Chawasema, a trader at Renaissance Capital, said.
"The highlight for me today has been the moves on the curve. Surprisingly the back end is slightly better bid despite more paper to be issued on the longer end at tomorrow's auction."
Analysts however said demand for South African bonds, particularly from offshore accounts, could start to wane if inflation treks higher, raising the likelihood of interest rate hikes.
The Reserve Bank left its repo rate unchanged last week, saying risks to the inflation outlook were evenly balanced but warned it would need to be more vigilant on inflation amid signs price pressures were becoming broad-based.
"Bonds have recorded strong inflows (in the first three months of the year) but the inflows could start to dissipate as the year unfolds if indeed inflation is perceived as a problem or if the market is more convinced of rate hikes," Tradition Analytics said in a note.
Recent government auctions have pointed to strong demand for inflation-linked bonds, traders noted.
"I think what investors are saying is that we are uncomfortable with where the rand is and the effect that will have on inflation," Chawasema said.
The rand is still up more than 4 percent against the dollar since the start of the year, but has shed about 3 percent of its value since late February's five-month highs. (Reporting by Stella Mapenzauswa; Editing by Susan Fenton)