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* Improved risk appetite boosts rand, bonds
* Rand hedges lead stocks lower (Updates levels, adds quotes)
JOHANNESBURG, June 12 (Reuters) - South Africa's rand firmed against the U.S. dollar and government bonds firmed on Monday, shrugging off a credit downgrade by Moody's of both local and foreign currency ratings as investors kept faith in the high yields on offer.
Stocks fell, led by rand hedge shares which came under pressure on a stronger rand.
At 1519 GMT, the rand traded at 12.7925 per dollar, 1.21 percent firmer than its close of 12.9475 on Friday in New York.
In fixed income, the yield for the benchmark government bond due in 2026 dropped 8.5 basis points to 8.405 percent.
Investec chief economist Annabel Bishop said the rand and local currency debt were boosted by renewed risk appetite.
"The global risk-on phase has been aided by particularly low yields in developed economies offering a good differential," Bishop wrote in a note.
"The inflows have strengthened the rand, proving the current risk-on cycle to be an opportune time to receive downgrades from a yield and currency perspective."
Moody's on Friday lowered South Africa's rating by a single notch from Baa2 to Baa3, the bottom of the investment grade table with a negative outlook, citing an abrupt cabinet reshuffle and reduced growth prospects.
On the bourse, the benchmark Top-40 index fell 1.54 percent to 45,169 points while the All-Share index was down 1.25 percent to 51,564 points.
Among the biggest losers were rand-hedged stocks, which make the bulk of their revenue outside South Africa and tend to weaken as the currency strengthens.
British American Tobacco fell 1.93 percent to 883.83 rand, Richemont lowered 1.37 percent to 103.44 rand and Reinet dropped 0.84 percent to 29.34 rand.
"Those kind of stocks are coming under pressure on the back of a stronger rand," said BP Bernstein trader Vasili Tirasis.
Bourse heavyweight Naspers fell 5.89 percent to 2525.00 rand after Chinese internet company Tencent Holdings , a third of which is owned by Naspers, came under pressure as Asian stocks began tracking the slump in U.S. technology stocks. (Reporting by Olivia Kumwenda-Mtambo and Tanisha Heiberg; Editing by Robin Pomeroy)