Long-dated government bonds extended a recent rally to an over two-month high on Monday narrowing the spread differential between the government 14- and 3-year benchmarks to a four month low.

The rand was down 0.5 percent to 8.6960 to the dollar at 1545 GMT. It bounced off 8.6520 earlier in the session to its weakest on the day of 8.71.

The 8.65 level has previous provided resistance to the rand in mid and late October and the currency may find it a hard barrier to break.

The resistance level is holding back rand bulls that rallied to a month high last week after better-than-expected current account and US payrolls numbers.

The rand's rally also encouraged buying on the long end of the government bond curve as investors continued the hunt for yield as coupon payments were reinvested into that end of the curve.

Yields on the benchmark 2026 bond fell to their lowest level since Sept. 28 and the 2048 bond rallied to similar levels.

"Guys are trying to enhance their yield plays which has been a theme for some time now. You get numerous coupon flows coming through December and that also brings buyers into the market," said Richard Farber, a fixed income trader at World Wide Capital.

The yield spread between the R186/R157 bonds narrowed to 188 basis points but the rally on the long end may be overdone, dealers said.

Domestic risks this week could come from higher-than-expected inflation and the start of the ruling ANC's internal leadership election on Sunday.

"Some factors are building against the recent rally. The rand has begun encountering stiffer resistance and its rally looks to be coming to an end whilst, technically, the R186 is looking quite overbought," Gareth Brickman, a market analyst for Johannesburg-based ETM wrote to clients.

President Jacob Zuma looks to have secured re-election as party leader, leaving investors to focus on policy decisions such as a final stance on minerals nationalisation.

Center>Copyright Reuters, 2012