The market continued to discount a further rate hike for most of October with the money market derivatives pricing in a 0.65% rate hike, and 3 month money market rates peaking a good 0.60% higher by mid-October. However, a string of positive data and a stronger rand towards the end of October resulted in a change in sentiment, with the market no longer looking for further interest rate hikes. Money supply and credit extension released were better than expected, with M3 measuring 15.9% vs. an expected 16.6%, and credit extension measuring 9.3% vs. an expected 10.1%. It appears that the four interest rate hikes this year are starting to affect consumer credit. The Medium Term Budget put a further positive spin on the market, with the 2004 inflation target band raised from a 3-5% band to a 3-6% band, with the 3-5% target band falling away until further notice. This significantly reduces the chances that the SARB will raise interest rates at the November MPC meeting. Subsequent further positive comments by Tito Mboweni have convinced the market that the fund managers have seen the last of the interest rate hikes, and the market continued to rally.

The duration of the fund was increased during the month and the fund was well positioned for the rally. The fund managers increased the bond component of the fund, as they believe that bonds will continue to rally as they approach the peak in inflation. Limited supply and generally low bond. Weightings in domestic portfolios are likely to add further support. Going forward, the fund managers believe that fundamentals are likely to continue to improve, and they will look for opportunities to add further duration in the volatility.

The upward trend in interest rates continued into September as the SARB raised interest rates for a fourth time this year, taking the Repo to 13.50% from a 9.50% at the start of the year. At the beginning of September, the money market derivatives were pricing in just over a 0.50% hike. The market, however, remained extremely divided over whether the SARB would leave rates unchanged, hike rates by 0.50% or hike rates by 1%.

The portfolio was well positioned for the move in interest rates. In anticipation of further rate hikes, we positioned the portfolio in the very short end of the money market yield curve. We were also able to take advantage of the volatility in the bond market. We took-on a light bond position into the weakness and were able to take some profits into the strength, thus earning a yield sweetener.

Going forward we remain cautious on the near term direction in interest rates. We have placed a small probability on another Repo rate hike, but feel that the more likely scenario is for rates to remain on hold for longer. We will look for opportunities to increase duration into weakness.

Upward pressure was evidenced across the money market yield curve during the month of August, as the market started to price in further interest rate hikes. Prior to the hike, the money market derivatives where pricing in 0.50% by September and a 0.80% by early next year. The shift in sentiment can be ascribed to a number of factors. These factors include, a more volatile and generally weaker rand; continued pressure on oil and food prices and evidence of second-round inflation.

It is becoming increasingly evident that the SARB is unlikely to meet its inflation targets. However, the market remained extremely divided over whether the SARB would raise interest rates given their limited appetite to tighten for a fourth time this year. Of the economists polled in the recent Reuters survey, half voted for no increase.

By hiking interest rates a full 1%, the SARB has shown some commitment to meeting the inflation target. Leaving rates unchanged would have had consequences on the SARB's credibility.

The fund was well positioned during the month for the rate hike with a large percentage of cash concentrated in the very short end of the yield curve. The fund managers remain cautious on rates over the short term.

The upward trend in interest rates continued into the second quarter of the year, with a further 1% rise in interest rates occurring mid June. This is the third time this year that the SARB has raised interest rates, taking the repo rate to 12.50% from a 9.50% level at the start of the year. The market largely anticipated the recent hike in June, with money market NCD rates rising during the quarter to price in most of the anticipated hike by May. Most of the upward pressure occurred in the shorter end of the curve with 3mth yields increasing 0.65% and 12mth yields increasing 0.20% for the quarter.

For most of the quarter, the fund remained a pure cash fund with no bond exposure. On a relative basis cash is currently offering a far more attractive return then the bond market with the R153 long bond trading 0.50% more expensive then the 12mth NCD rates. We feel that the bond market has rallied too fast, too quickly and is pricing in too much good news. The fund remained defensively positioned during the quarter, however we will look for opportunities to increase duration into weakness as we approach the peak in inflation.

Money Market rates remained broadly stable during the month of April after the 1% interest rate hike in March. However, some upward pressure was seen in the shorter end. Three month NCD rates increased 45bp during the month and are currently yielding 11.25%.

Some upward pressure on call and one month rates was also experienced at month end. The fund remains short in duration in line with our view that we are expecting further interest rate hikes. The short duration allowed us to take advantage of the upward pressure in the very short end.

The fund currently holds no bond investments and remains invested purely in money market instruments. At current bond yields, bonds appear to be pricing too rapid a decline in inflation and the fund manager believes they are vulnerable to further weakness in the near term. The fund manager will look to add bonds to the portfolio in any sell-off.