The weakness in the rand has been the major driving force in the market over the past month. It depreciated from R$7.19 to R$7.76 over that period. This weakness has been driven largely by concerns over South Africa's very high current account deficit, and more recently by weakness in commodity prices. While the CPIX number came out in line with expectations at 5.0%, the PPI number was a lot worse than the market expected, coming out at 9.2% versus the expected 8.4%, and up from the previous months 8.1%. Concerns have also been expressed by the Central Bank over the continued very high levels of credit extension. The August private sector credit extension numbers came out at 25.0% versus the expected 24.7%.

These factors have heightened expectations of further rises in official rates. There is now a general expectation that the Reserve Bank will increase the repo rate at its next meeting in October. The debate is only over whether it will be 50 or 100 basis points. This has worked its way through to money market rates with the 12- month NCD rate increasing from 9.05% to 9.35% and the 3-month NCD rate from 8.15% to 8.20% over the month.

What has been surprising is how resilient the bond market has been under these circumstances. One would have thought that the weaker rand would have had higher inflationary implications. What may have offset that is the oil price which came down from $70.03 to $62.48 over the month. The latest inflation consensus numbers do not reflect a major concern from market participants. A further supporting factor has been the 10-year US bond rate that came down from 4.75% to 4.65%.

The current level of money market rates is still more than compensating for the expected further 1% rise in the repo rate. We have therefore continued buying longer dated instruments to the extent that we are able to within the constraints of the maximum averages term of the portfolio. The current yield on the fund, as published, is 8.28%.

June was a month of major significance for the South African interest rate market. It was the first time since the interest rate cutting cycle started in June 2003, exactly 3 years ago, that the official interest rates were hiked. At the June Reserve Bank Monetary Policy Committee (MPC) meeting the repo rate was unexpectedly raised by 50 basis points. The motivation for the hike was concern over the rand, the oil price as well as the very high level of credit extension and their potential inflationary implications.

During the month, after the interest rate hike, the next major shock was the announcement of South Africa's highest current account deficit as a percentage of GDP, at 6.4%, for 24 years. This had an immediate negative impact on both the rand and interest rates. Other negative news for our market was a rise in the Brent oil price from US$71.50 to US$72.44 and the US 10-year bond rate from 5.06% to 5.19%, over the month. To add to our woes, the PPI numbers came out at 5.9%, higher than the expected 5.6% and up from the previous month's 5.5%.

All this negative news had the impact of raising the rate on the RSA government benchmark bond, maturing in 2015, from 7.745% to 8.65% over the month. The money market was also meaningfully impacted upon with the 12-month NCD rate rising from 7.63% to 8.50% and the three-month rate from 7.00% to 7.45% over the month.

With the rand having deteriorated further and the oil price having risen since the last MPC meeting, the risks of further hikes in the repo rate remain pretty high. We will therefore continue investing in the shorter end of the money market yield curve until there is more certainty over the future path of interest rates.