The MPC decided to keep rates on hold at 5.5% given low growth concerns, heightened risk aversion and increased volatility of capital flows. The portfolio was positioned for an unchanged rate decision, so the decision to keep the repo rate on hold had no material impact. The rand weakened by 13.7% against the US dollar due to risk aversion and foreigners selling large amount of equities and bonds, increasing inflation expectations. This resulted in Forward Rate Agreements (FRAs) rising and not pricing in a cut in November as was evident a few weeks ago, but rather moving out to a 40% chance of a cut in March 2012.

Local bond yields weakened across the curve as yields rose due to foreigners selling R16bn worth of bonds during September. Year-to-date, foreigners are still net buyers of R34bn of bonds. The ALBI performance for the month ended September was -2.1%. Risk aversion has increased volatility and inflation uncertainty at the long end, while low growth concerns limits the increase in short-end yields together with the implications for government's fiscal position and bond issuance.

The FTSE/JSE SA Listed Property Index returned -2.1% during September as increasing bond yields and risk aversion detracted from the recent performance. Despite borrowing costs remaining at relatively low levels, difficulties remain in the sector with minimal rental growth prospects in the near term and a sluggish recovery in occupancy rates.

Currently, the portfolio has exposure to money market, short-term credit bonds and inflation-linked bonds, both locally and offshore.

The recent rand weakness has helped the portfolio with the rand depreciating by 19% versus the dollar during the quarter. The rand, despite the recent sell-off, continues to be overvalued on purchasing power parity (PPP) basis. We took advantage of the selloff and reduced some of the offshore currency exposure.

The performance of the offshore allocation for the month was driven by its exposure to euro as well as widening in credit spreads. The euro declined against the US dollar by 6.9% during the month. The decision was taken during the month to sell the USD calls and hedge fully back into USD. This was done over concerns that the crisis in Europe could severely impact the value of the euro and to reduce the amount of currency options premium. We also saw a widening of credit spreads in international banks.

The portfolio structure remains short, mainly invested in a spread of floating rate notes, short-to-medium-dated bond credit and inflation-linked bonds. We have maintained our zero long government bond position. Although we have seen yields rise sharply over the month, we still see value in the short and medium dated credit bonds as we do not foresee any risk of a rate hike in the short term. The portfolio is positioned to benefit from further rand weakness and the holding in inflation-linked bonds should benefit from the rising level of inflation.

The three-month Jibar has remained flat at 5.58 since the beginning of the year. The FRA market rallied significantly over the first quarter of 2011 where the market was pricing in rates to go to over 8% in two years’ time. Over the second quarter of this year, the FRAs have come off by around 50 bps on the longer end and the market doesn't believe that rates are going to go up as aggressively as previously anticipated.

Local bonds ended the quarter firmer across the curve as yields fell on continued foreign interest. Although bonds are showing value with implied inflation now at levels between 6.0% and 7.0%, there still remain concerns as to how the supply will be absorbed. Although foreigners have remained as buyers during the quarter, the flows have been volatile over the past year. This could mean that yields may remain cheap for longer, especially at the back end of the yield curve.

The FTSE/JSE SA Listed Property rose in June by +1.17% despite the All Share Index falling by -2% for the month. Despite the good performance in the property sector, the trading environment for property companies remains difficult, with retail property affected by the drop-off in consumer spending and the big four banks tightening of interest rates offered on mortgage bonds. We therefore remain cautious at this stage and continue to look for opportunities with regard to corporate actions in the property space.
The rand remained strong for the month, strengthening to R6.76 to the US dollar. June saw some volatility in international fixed income markets with the situation in Greece again making the headlines. We saw a strong rally in US treasuries during the month, but the resolution in the last week of the month saw a complete reversal of these gains. The euro also had a volatile month, but ended the month essentially unchanged.

We continue to have protection in the global portion of the portfolio from a fall in the euro in the form of USD calls. The portfolio’s exposure to the euro is 28% in the event of dollar strength/euro weakness, but 60% in the event of dollar weakness against the euro. Our protection is in the form of dollar calls which is why we have this asymmetric profile. Year-to-date, 2011 has seen volatility in the rand/dollar exchange rate, the rand having depreciated through the R7 level in January 2011 and then strengthening to above that level again in February and March. For the quarter from April to June, the rand has experienced very high levels of intra-day and intra-month volatility, but has only weakened very marginally to the USD for the quarter.

The portfolio structure remains short, mainly invested in a spread of floating-rate notes, short- to medium-dated bond credit, and inflation-linked bonds. We have maintained our zero long government bond position and have increased the exposure in the two and three year fixed area via money market assets.

In addition, the international exposure is made up of mainly USD inflation-linked bonds to enhance yield in an environment of low rates. The portfolio should benefit from any further increases in headline inflation via the local inflation-linked bond holdings. The shorter dated credit bonds are at attractive yields and reflect very good value.

At the February 2011 MPC meeting, Governor Gill Marcus reiterated that the risks to the outlook for domestic inflation have increased on the upside, mainly as a result of cost push pressures. Marcus added that the MPC would not "be soft" on inflation going forward, implying that they would use monetary policy to stem a possible inflationary spurt.

Two of the factors which the South African Reserve Bank (SARB) quantified as potential upside risks to the inflation target continued to dominate the spotlight in March. The price of Brent Crude rose 4.9% for the month, but this was counterbalanced to a certain extent by the rand that strengthened by 3% versus the US dollar. Year-to-date, Oil has risen by 23.9%, and with the rand having weakened by 2% in the same period, we may see continued upward pressure on the inflation outlook going forward.

Since the curve has started to shift up, we are starting to see some yield pick-up opportunities at the longer end and we will look to take advantage of this at some point. Credit exposure has been increased, but remains conservative in selected issues where higher yields could be locked-in. We continue to look for yield pick-up in credit and other sweeteners without taking on much duration risk.

Local bond yields ended the quarter mixed as shorter-dated bonds firmed on the back of a recovery in the currency, while longer bonds remained weak on supply and inflationary concerns. The benchmark R157 was 51 bps higher at 7.82%, while the long-dated R209 was 76 bps higher at 9.04%. The ALBI performance for the quarter ended March was -1.57%. The 1-3 year area was the best performing sector for the quarter delivering 1.27% and the 12+ year was the worst performer with -3.92%. The ALBI underperformed cash by 0.26%.

The FTSE/JSE SA Listed Property Index has lost 2.2% year-to-date, but has still gained a healthy 15.4% for one year to 31 March 2011. The overall equity market gained 0.52% while listed property surpassed that performance rising by 3.4% for this month.

We remain cautious at this stage and continue to look for opportunities with regards to corporate actions. We will increase the equity exposure in market weakness.

The heightened uncertainty surrounding the banking crisis and collapse of Lehman's in Q3 2008 drove many investors into the liquidity of the US dollar and US treasuries. The subsequent injection of significant liquidity into the markets by the US Fed and backing of the remaining US banks saw that uncertainty wane, and as a result the significant appreciation, which occurred in 2008, unwound during the course of 2009.

The strengthening of the US dollar in 2010 was accompanied by the secession of the quantitative easing process in the US and concerns over the solvency of a number of European sovereigns. The Fed removed concerns over premature tightening when it introduced quantitative easing Part II. As a result, the dollar weakened in the second half of 2010.

Year-to-date, 2011 has seen volatility in the rand/dollar exchange rate -the rand having depreciated through the R7 level in January 2011 and then strengthening to above that level again in February and March. The month of March has seen the rand range trading at around the R6.75 level.

Although bonds are showing value with implied inflation now at levels between approximately 6.5% and 7.5%, there still remain concerns as to how the supply will be absorbed and yields could remain cheap for longer, especially at the back end of the yieldcurve.

Although there is no immediate pressure on inflation, we are starting to see signs of a recovery in vehicle sales, retails salesand credit extension, which suggest that we may have seen the end of the rate cutting cycle. Although we have seen some recovery in the rand, the continued strength in the oil price is likely to raise inflationary concerns down the line.

The portfolio structure remains short, mainly invested in money market floating rate notes, short-dated bond credit and / or inflation-linked bonds. We have maintained our zero long government bond position. Continued funding pressures should place upward pressure on yields. We have increased credit exposure selectively where higher yields could be locked-in.

Property shares weakened for Marchand the environment remains difficult due to the rise in building and funding costs. We, therefore, continue to hold zero property exposure but will continue to monitor the asset class for opportunities in stocks withattractive yields.

At the November meeting of the Monetary Policy Committee, the repo rate was cut by 50 basis points (bps) to 5.5%, the lowest level since 1974. The Governor reiterated that there was further room for stimulus, given the weakness in the supply side of the economy, but also tempered expectations of further cuts, stating that the inflation outlook remains evenly balanced and key risks remain to the lowered inflation outlook going forward. With no South African Reserve Bank Meeting in December, commentators focussed on the market components which could influence short-term inflation and the possible long-term effect it might exert on headline inflation.

The longer end of the curve outperformed the shorter end over the quarter, as rates fell over the quarter.

International bond yields have weakened sharply over the quarter as the economic outlook in the US shows signs of improving, while sovereign debt issues continue to pose problems in the euro region. On the other side of the world Australia, India and China recently hiked rates mainly on inflation concerns. This uncertainty has translated into volatile currency and bond markets.

Local bond yields were higher at the longer end of the curve as yields trended weaker on the back of weaker global bond markets as well as foreign selling. A stronger rand supported shorter-dated bonds. The benchmark R157 was 1 bp higher at 7.31%, while the long-dated R209 was 32 bps higher at 8.28%. The ALBI performance for the quarter ended December was 0.75%. The 1-3 year area was the best performing sector for the quarter delivering 1.83% and the 12+ year area was the worst performing sector with -0.63%. The ALBI underperformed cash by 0.46%.

Demand for local bonds continues to be driven by foreign flows. Foreigners were again net sellers of R6.9 billion in December after being net sellers of R8.6 billion in November and R1.6 billion in October. Foreigners were net buyers of R36.6 billion in Q3 2010.

During the quarter, the 1-3 year sector of the index performed best with a return of 1.83%. The rand ended the quarter firmer -up 4.9% against the US dollar and 3.3% stronger on a trade-weighted basis. South Africa's country risk premium, the yield spread of South Africa's dollar-denominated bonds over US treasuries, widened by 2 bps to 1.51% over the quarter. Global bond yields ended the quarter weaker. The US 10-year was 72 bps weaker at 3.28%, euro area bonds yields rose 67 bps to 2.98%, and UK bonds rose 43 bps to 3.40%.

The FTSE/JSE SA Listed Property performed below the JSE All Share in December, the index rising 2.2% in a strongly rising market; the FTSE/JSE Top 40 rose 6.7% for the month. For the one year to 31 December 2010, the Property Index has risen a healthy +29.62%. We are starting to see an uptick in confidence levels, which has led to a resultant rise in the performance of the property indices. However, banks are not offering attractive lending rates and new activity in the sector has seen only a marginal uptick. Property earnings thus remain at risk and we, therefore, remain cautious.

Although bonds are showing value with implied inflation now at levels around 5.5% to 6.0%, there was no indication in the Medium-Term Budget that the increased revenue would be used to reduce local funding. Foreign flows have turned negative in the past two months and yields have risen as a result. Although there is no immediate pressure on inflation, we are starting to see signs of a recovery in vehicle sales, retails sales and credit extension which suggest that we may be close to the end of the rate cutting cycle and the probability is more in favour of a rate hike than a rate cut in 2011.

The portfolio structure remains short, mainly invested in money market floating rate notes, short-dated bond credit and / or inflation-linked bonds. We have maintained our zero long-government bond position. Continued funding pressures should place upward pressure on yields. We have increased credit exposure selectively where higher yields could be locked-in.

Despite property shares strengthened over the month, the environment remains difficult due to the rise in building and funding costs. We, therefore, continue to hold zero property exposure, but will continue to monitor the asset class for opportunities in stocks with attractive yields.

The international allocation will be managed both up and down as the valuation of the rand changes. We have focused on lifting yield via selected high-yielding euro and US dollar-denominated instruments, some of which are from South African issuers.