The All Bond Index increased by 3.7% over the 3rd quarter. The respective total returns were: 1-3 year +2.6%, 3-7 year +3.0%, 7-12 year +3.6% and 12+ years 3.9%. Inflation linked bonds returned 1.4% over the quarter, while cash earned 1.8%.

The Federal Reserve Banks' FOMC kept rates steady through the quarter while seeming surprised with stubbornly low inflation against a strong labour market. The tone of the Fed grew more hawkish toward the end of the quarter. They signalled that Federal Reserve balance sheet reduction would commence this year as expected but the Fed's tone turned more hawkish than was anticipated signalling the strong possibility of another policy rate hike in the last quarter. The US 10 year bonds started the quarter at 2.3% yield, moved down to 2.0% and reversed back to end at 2.3% again. The European Central Bank kept its policy rates unchanged at both of its monetary policy meetings but comments from governor Mario Draghi suggested conditions were right to begin tapering back on their quantitative easing program in the imminent future.

The oil price moved from $49 to $55 per barrel over the quarter. Politics remains front and centre domestically as expected into the December ANC elective conference that will determine who will take the party forward from here. For the MPC it was a quarter of surprises for markets. July's meeting saw the MPC cut rates by 25 basis points in a move that was against consensus. Based on the improved inflation profile the committee agreed that a cut was required. This trend was not continued at the September meeting as the committee chose to keep rates on hold in a split decision siting increased risks to inflation from the currency into year end.

2nd quarter GDP figures rebounded to 2.5% (QoQ SA annualised) breaking out of the recession (-0.6% and -0.3% for the previous 2 quarters). Growth is expected to remain weak for the remainder of the year despite an improved global growth backdrop as domestic business and investor confidence remains low amidst political uncertainty. The Bond fund maintained a moderately defensive position over the quarter and will continue to adjust its duration and exposure as required in this heightened risk environment.

The fairly significant decline in consumer price inflation (CPI) from 6.6% in January to 6.3% in February (year on year), provided further evidence that the inflation cycle is on a downward trend. The Monetary Policy Committee (MPC) thus decided to keep the repo rate on hold at 7.0% at its meeting in March, with five members voting for no change and one for a 25 basis point cut, signaling the end of the tightening cycle. The decision was in line with market expectations. CPI, however still remains above the SARB’s target band of 3.0%-6.0%
Unpredictable local politics dominated all headlines toward the end of the quarter as speculation of a cabinet reshuffle resurfaced after the President Jacob Zuma ordered the Finance Minister and his deputy to return home immediately from a US and UK investor roadshow. In a brutal display of power President Jacob Zuma announced the much-anticipated cabinet reshuffle. Zuma fired Finance Minister Pravin Gordhan along with 9 other ministers, and replaced Pravin Gordhan was with former Home Affairs Minister Malusi Gigaba.

The Rand reacted negatively to the announcement of the firing of the respected Finance Minister and depreciated sharply against the US Dollar amid rising concerns about South Africa’s fiscal path, fragile growth and its investment grade credit rating. It lost close to 5% of its value as the news broke. Prior to the cabinet reshuffle the rand traded at its best level in almost 20 months at 12.32 against the US Dollar, supported by a less hawkish stance from US Federal Reserve and a narrower than expected current account deficit number of 1.7% of GDP. It however weakened to a high of 13.62 after the Finance Minister’s dismissal.

The cabinet reshuffle has serious implications for the South Africa’s sovereign credit rating and increases the likelihood of a downgrade. This combined with a weaker currency could have a negative impact on the inflation outlook.

Money market yield curve flattened over the quarter as the market discounted a 25 basis rate cut early next year as inflation forecasts were revised lower. 1 year NCD rate closed at 8.325 at the end of March. The yield on the 10 year government bond (R186) traded a low of 8.31% and a high of 9.20% before ending quarter at 8.84%

A large percentage of the Income fund remains invested in floating rate notes.