For the past six years the principal determinant of bond yields in South Africa has been the attitude of foreign investors, who have been significant buyers of South African government bonds. Inward investment flows have been influenced more by global economic trends than by specifically South African issues. Since July, this has changed. There has been a major sell-off of emerging market currencies, reflecting concerns regarding emerging market growth prospects and, more specifically, the outlook for China. South African bonds, which previously were highly correlated to changes in US bond prices, have sold off at a time when US bonds have strengthened. Specifically South African issues are likely to play a much bigger role in determining our interest rates than they have in recent years.

South Africa is experiencing serious economic problems. We are not alone: most emerging markets are facing similar challenges. Brazil's credit rating has been downgraded below investment grade by the rating agency Standard & Poor's. The rating agencies have warned the South African Treasury that it must stick to its spending ceiling if it is to avoid a similar fate. Should South Africa lose its investment grade status, the consequences for our bond market could be dire. The Treasury has assured investors that the government will take the necessary steps to avoid this.

After hiking short rates by 0.25% in July, the South African Reserve Bank's Monetary Policy Committee (MPC) chose to leave them unchanged in September. However, the MPC still regards real rates as being too low. Despite recent rand weakness, inflationary pressures remain benign. However, the possibility that inflation will surprise on the upside remains a significant upside risk to the outlook for interest rates.

Our cautious investment stance remains unchanged, with an average duration of 5.2 years compared with the benchmark duration of 7.0. A steep yield curve does provide some compensation for the risks discussed above.

Commentary contributed by Sandy McGregor

Since the end of January there has been a significant sell-off of emerging market bonds and equities. Generally negative sentiment towards emerging markets has had an adverse effect on South African bond prices.

The US Federal Reserve Board continues to signal that it is going to move away from zero rates, probably before the end of 2015. The market consensus is that US rates will increase by 0.25% in September. Subsequent increases are likely to be muted. There seems to be consensus among central bankers that while interest rates should be above zero, they are likely to remain at very low levels. Accordingly, in the longer term, the international environment should favour continued flows into South Africa's high-yielding bonds.

South Africa's economy continues to stagnate. While credit requirements of businesses are growing strongly, borrowing by households remains extremely subdued. The rand exchange rate has been very weak. The Reserve Bank remains concerned that interest rates are too low given rising inflationary pressures. The windfall from lower oil prices has been extremely short lived. There is now a significant probability that the Monetary Policy Committee will respond to the inflationary consequences of a weaker rand by increasing rates independently of any move by the US Federal Reserve.

Given these risks, the duration of the Fund's portfolio has been significantly below that of its All Bond Index benchmark. However, it has been possible to generate a superior yield by holding a proportion of the portfolio in high-yielding bonds issued by credit-worthy corporates.

Since December 2014, the duration of the Fund has remained almost unchanged at around 4.8 to 5.0, despite an increase of the benchmark duration from 6.5 to 6.8. The average yield (before fees) has increased from 8.3% to 8.8% over this period due to market movements. The composition of the portfolio is largely unchanged.

Commentary contributed by Sandy McGregor

On traditional metrics, the US economy is growing sufficiently to justify an increase in short-term interest rates from current levels, which are close to zero, and the Federal Reserve has indicated that it will probably start hiking rates during the second half of 2015. However, the European Central Bank (ECB) has now embarked on its own programme of printing money, which will ensure that the large-scale creation of liquidity by central banks will continue. As the ECB buys up European government bonds it will crowd out private sector investors, encouraging money to move from Europe into other markets. Accordingly, the global environment will continue to be supportive of foreign investment flows into South Africa.

While the recent dramatic fall in the oil price has boosted disposable incomes, South Africa's economy continues to stagnate. Inflation was 3.9% year-on-year in February 2015, but will probably rise through the rest of the year as the benefits of lower petrol prices dissipate. The Monetary Policy Committee of the Reserve Bank continues to regard current short-term rates as being too low, given the probable future trend of inflation. In particular, it worries about the vulnerability of the rand in light of South Africa's large current account deficit and its dependence on fickle investment flows. While the current combination of low inflation and a weak economy justify leaving interest rates unchanged in the short term, a normalisation of US interest rates could force South Africa to follow suit.

As a result of these risks, the Fund continues to have a duration lower than its JSE All Bond Index benchmark. However, a steep yield curve compensates for these risks, to a degree, and the portfolio includes certain high-yielding long-dated securities. The exposure to Eskom is confined to government guaranteed bonds.

Commentary contributed by Sandy McGregor

The sudden collapse of the price of oil has important consequences for global bond markets. Energy companies and certain oil exporting countries are now under significant financial pressure, which could trigger a wave of defaults. Among central banks, heightened concern about deflation is likely to postpone any normalisation of interest rates. Low rates could be with us for a long time yet.

The slowdown in emerging markets has put downward pressure on commodity prices. Conditions have become difficult for commodity producers such as South Africa. The domestic economy can best be described as stagnant. Despite this, Fitch and Standard & Poor's have both chosen to reaffirm their previous ratings on South African debt. They are giving credit to the National Treasury's serious efforts to bring the country's fiscal imbalances under control. To a large extent the success or failure of this project will depend on the outcome of wage negotiations between the government and the public sector unions in 2015. Excessive wage increases could result in further downgrades.

While the rand has been relatively stable compared to currencies of other commodity-producing countries, it otherwise has been weak. Since August 2013, foreigners have been significant sellers of South African bonds.

With lower oil prices, the inflation rate will be well below the South African Reserve Bank's target of 6%. Although the Monetary Policy Committee has warned that real rates are too low, the combination of a stagnant economy and declining inflation makes it unlikely that short-term rates will be increased any time soon.

The Fund continues to have a duration less than its All Bond Index (ALBI) benchmark, because there are significant global financial risks which could adversely impact South Africa's small open economy. However, the steep yield curve does, to a certain degree, compensate for these risks. Accordingly, the Fund includes high-yielding, longer-dated securities.

Commentary contributed by Sandy McGregor