Globally the private sector is saving more and deleveraging, providing an increasing pool of money which is being invested into assets, especially bonds. Some of this is flowing into South Africa. During the first nine months of 2010 foreigners have invested a net R62 billion in South African bonds. These flows have more than compensated for the shortfall in domestic savings, and have strengthened the rand, which in turn has had a beneficial effect on inflation. As a consequence SA bond yields have declined significantly.

We remain cautious about these trends because they cannot continue indefinitely and any reversal in investment flows could seriously weaken the rand and cause a big sell-off in the bond markets. Accordingly, the Fund's duration remains significantly below that of its All Bond Index benchmark.

The government's 2010-2011 budget estimated that the public sector borrowing requirement will be in excess of R260 billion per year until 2013. Funding these deficits is a formidable challenge and has put upward pressure on interest rates, especially at the long end of the yield curve. This is especially problematic because South Africa has a low savings rate and is dependent on inflows of foreign capital. The well-above inflation wage increases recently awarded by some parastatals may put upward pressure on the inflation rate in the medium term, especially if they are followed by similar increases in the broader economy. In May consumer price inflation was 4.6%.

Longer bonds have rallied as investors discount the lower inflation rate and a possible further rate cut. We believe the good news is fully discounted by the market and accordingly we favour bonds with a short- to medium-term duration, and the average duration of the Fund is substantially less than that of the All Bond Index benchmark.

The government's 2010-2011 budget estimated that the public sector borrowing requirement will be in excess of R260 billion per year until 2013. Funding these deficits is a formidable challenge and has put upward pressure on interest rates, especially at the long end of the yield curve. This is especially problematic because South Africa has a low savings rate and is dependent on inflows of foreign capital. We continue to favour bonds with a short- to medium-term duration, and the average duration of the Fund is substantially less than that of the All Bond Index benchmark.

The Medium-Term Budget Policy Statement of 27 October 2009 estimated that the public sector borrowing requirement will be in excess of R250bn per year until 2013. Funding these deficits will be a formidable challenge and will put upward pressure on interest rates, especially on the long-end of the yield curve. Accordingly, we continue to favour bonds with a short- to medium- term duration, and the average duration of the Fund is substantially less than that of the All Bond Index (ALBI) benchmark.