The third quarter of 2018 was indeed an interesting quarter for interest rate sensitive markets. The period was characterised by rand volatility, rising oil prices and weaker bond yields. Most of the weakness experienced by the rand was driven by the loss of support for emerging market currencies as global investors sought the safety of developed markets. After touching 13.10 to the USD the rand weakened to close the quarter at about 14.20 to the USD. After some initial strength, the bond market moved in tandem with the currency. The R186 Government Bond yield rallied to 8.57% before losing ground to end the quarter close to 9.00%. The return from the All Bond Total Return Index (ALBI) was muted delivering a mere 0.78% for the three months under review. Most of the gains were made in the shorter end of the yield curve as market participants reduced their sensitivity levels by shortening duration.

Most of the shift in money market yields occurred in the 12-month area of the curve with 12 month NCDs selling off by about 25 basis points to close at 8.30% for the quarter. The SARB Monetary Policy Committee (MPC) meetings in July and September resulted in no change in interest rates over the period but the tone of the rhetoric has become more hawkish with three of the seven members voting for a rate hike at the last meeting. Even though as a house we do not foresee a change in rates in the near term, the risks of a rate hike have risen substantially. MPC members have stated that the committee's stance remains accommodative but interest rates may have to be raised to keep inflation within the target bands.

We do however look ahead to the imminent Medium Term Budget Policy Statement (MTBPS) to give some direction within a weak economic environment. It remains to be seen how the finance ministry will tackle the fiscal challenges facing our country ahead of critical events such as the general elections next year.

The Fund continues to invest strategically across the money market yield curve to maximise yield while remaining within the risk parameters defined for money market funds. The Fund's retail asset class delivered 1.86% for the quarter while the STeFI composite index was up 1.78%.

The fixed income market started the year on continued strength after the elective conference in December and the global risk on trade, which saw the ALBI return just over 8% for the first quarter and cash returning 1.76%.

The budget delivered in February saw improvement in the budget deficit compared to the Medium-Term Budget Policy Statement forecast. The lower deficit was supported by a 1% VAT increase and the tighter fiscal stance with expenditure cuts.

With all the positivity following on from the Ramaphoria and positive budget, South Africa was able to avoid a downgrade by Moody's and our investment grade credit rating was left unchanged at Baa3 and lifted to stable outlook.

The SARB revised their inflation outlook marginally down for 2019 from 5.4% to 5.2%. The SARB have scope for one more rate cut of 25bps and with the rand much lower than the SARB's previous level of R12.90, inflation printing could be lower than the SARB's forecast over the next year. Risks to this view will mainly be impacted by international events should the trade wars between the US and China materialise and impact the oil price and currency negatively. We will monitor these to determine the impact on inflation going forward to ascertain if the rate cutting cycle will continue.

The Fund benefitted by being long duration before March cut. Also having taking advantage of times when yields sold off in Q4 2017 we added good quality high yielding assets which has added to current performance. The Fund generated 2.6% for the quarter and the STeFI returned 1.8%, the fund outperformed by 0.8% for Q1 2018.