Money market rates continued to fall throughout the quarter, spurred on by more aggressive easing of the repo rate. At the June Monetary Policy Committee (MPC) meeting, the frequency of meetings was changed from quarterly to every two months, providing the committee with more scope to take action on underlying interest rates and to better guide inflation into the Reserve Bank's 3% -6% target range.

This quarter saw two reporate cuts: 1% in August and 1% in September, taking the repo rate to 10%. The September cut was as a result of a "special" MPC meeting, which took the market by surprise and seemed to be in reaction to new information at the Reserve Bank, giving justification to the quick action taken. However, the question remains: what new data would justify such a move as no reasoning was provided in the post-meeting statement to the public. The 3.5% reporate cut seen over the last four4 months can be interpreted as aggressive, however, the persistently strong rand clearly supports such continued easing.

Money market asset yields have fallen fast this quarter, with three month NCD rates starting the period at 11.6% and ending at below 9%. Twelve month NCDs moved from 10% to 8.45%. Call rates have held up well, falling less than in other areas of the curve. However, banks need to ensure that they keep overnight deposits on their books and the only way to do so in a falling interest rate environment is to entice overnight depositors with higher call rates.

Going forward the market is pricing in a further 2% repo rate cut for the balance of the easing cycle. This is bullish and will depend largely on the sustainability of CPIX within its target range, and is of course highly dependent on the behaviour of the rand over the next 12 months.

Over the quarter, the Coronation Money Market Fund has been long duration in line with the fund manager's interest rate view. Corporate money market issuance has been on the up, and the fund manager's participate in these regularly, looking for credit diversification and yield -two important objectives of the fund.

The unannualised year to date return to the end of September was 9.6%, and 13% for the past 12 months. Given that interest rates have fallen quickly, the fund has achieved a competitive return this year.

After a rather quiet first quarter, the money market woke up and rallied strongly during the past quarter. This was in response to a greater probability that interest rates would be much lower going forward, fuelled by the revision of CPIX from January 2002 as a result of the error made by Stats SA regarding the rental component of housing within the inflation basket. This resulted in CPIX being 1.9% lower than was previously reported.

Previously, the money market had been expecting a 1% reporate cut in June. But with the revision in CPIX, it could now comfortably start to anticipate something greater. On the back of a more aggressive rate cut scenario, money market rates fell fast with the three month JIBAR, a three month average reference rate, falling from 13.4% to 11.5%. Twelve month rates went from 13% to less than 10%, hence pricing at least a 3% reduction in interest rates over the next 12 months. This type of money market action has not been seen since the end of the interest rate peak in late 1998.

The Coronation Money Market Fund was well positioned for lower interest rates. The fund's duration was close to its maximum 90 days during this time, and the fund held onto a higher yield for longer as interest rates fell. Going forward, we expect this to continue as interest rate easing takes place.

The fund has moved up in the unit trust ranking tables this year. This can be attributed to the wider distribution of assets held within the fund, greater access to market opportunities and greater focus on yield and market timing. Furthermore, the fund totaled R1bn for the first time.

The year started off geared for a series of interest rate cuts. The world economy was slowing and it appeared that we had reached the peak in the inflation cycle in South Africa. With the sudden strength in the currency, investors began to speculate on the first interest rate cut being sooner rather than later. However, the South African Reserve Bank (SARB) was quick to respond with the message that the repo rate would only be reduced at a time when there was clear evidence of inflation falling on all fronts, and that the SARB's inflation target of 3-6% could be met.

Hopes of a March interest rate cut were dashed, and the short end of the yield curve adjusted upwards to re-price the new outlook for a June rate cut. Since then, money market interest rates have been steady with 3-month rates around 13.30% and 12-month rates at 12.85%, while the fund manager's cautiously watch the inflation data.

The fund manager's expectation is for a 2% interest rate cut this year, with the first 1% expected in June and the other 1% in September.

The Coronation Money Market Fund has fared well during the quarter, returning an annualised 10.95%. Duration on the fund has been close to its maximum of 90 days during the period, which is in line with the fund manager's interest rate view. The investment strategy followed has been to seek out good opportunities across the curve.

It would appear that the peak in the inflation cycle has also coincided with the peak in the monetary policy cycle. There should be no further rate hikes, and now South African's await news of a rate cut.

Twelve month NCD's are currently yielding 12.70%, compared with in excess of 14% barely three months ago. During the quarter, the fund manager's steadily increased exposure to longer term assets and, given the expectations of 2003 being a year of rate cuts (perhaps even extending into 2004) the fund's maturity will be maintained at relatively high levels.

With regard to credit risk, there was very little change to the fundamental outlook, and the fund's strategy remains one of delivering consistent income levels via a prudent and conservative investment policy.