Money Market yields rallied during the third quarter before selling off sharply to end on a weaker note. The 12mth NCD kicked up 0.30% off the low to end the quarter yielding 7.30%. The rally at the start of the quarter was driven by domestic fundamentals as better than expected inflation data as well as a strong Rand led the market to become overly optimistic on interest rates. Prior to the August MPC meeting, the market was pricing in a 70% chance of a further 0.50% cut in interest rates.

The market however was severely disappointed when the SARB left rates on hold and delivered a more balanced statement. In addition, significantly higher oil prices and inflationary concerns drove the negative sentiment in the latter half of the quarter as the short end of the market priced out all of the interest rate cuts.

We remained invested in the short end of the curve and were thus well positioned for the move. Continued high oil prices have led us to become more cautious on inflation going forward. Although we expect that the SARB will to some extent look through the rise in inflation from higher oil prices, we believe that there will be some upward pressure on interest rates in the first half of next year. As such we continue to maintain our short positioning, but will look for opportunities to buy into weakness.

Money market yields rallied significantly during the second quarter as the SARB surprised the market by cutting interest rates by 0.50% at the April MPC meeting. A Reuters Consensus survey taken before the April meeting showed that of the 15 economists polled, all expected the repo rate to remain on hold. The rally in the second quarter reversed the bearish sentiment seen in the first quarter as the NCD curve shifted down in a parallel fashion, 0.60% across the curve. We maintained our position, remaining long the benchmark and were thus well positioned for the quarter.

Although we expect interest rates to remain on hold going forward, we believe that the risk of further interest rate cuts will underpin the shorter end of the market in the medium term. As such, we will continue to maintain our current positioning and will look for opportunities in the middle area of the cash curve. Ultimately however, we expect yields to rise in the longer term as the base effects of inflation start to exert some upward pressure on CPIX.

The South African Reserve Bank (SARB) surprised the market by cutting the repo rate by 0.50% at the April Monetary Policy Committee (MPC) meeting. The Reuters Consensus on expectations showed that of the 15 economists polled, all expected the repo rate to remain on hold. As a result of the surprise, money market yields rallied significantly, reversing the negative sentiment we saw in March. 12mth NCD's rallied 0.70% and the 3mth NCD's rallied 0.55% during the month. The Investec Money Market Fund was positioned slightly long the benchmark and was thus reasonably positioned for the move.

The interest rate cut indicates that the SARB is uncomfortable with a strong Rand. Going forward, this increases the chance of a further cut in interest rates. We believe this risk will underpin the market in the medium term, but ultimately expect yields to rise as the base effects of inflation start to exert some upward pressure on CPIX.

Money market yields sold off in March, reversing the positive trend in rates since January. 12mth NCD's rose 0.35% and 6mth NCD's rose 0.15% to end the month yielding 7.70% and 7.50% respectively. The sell-off was driven by a change in global sentiment which led to some risk aversion in emerging markets. With the trade weighted Rand falling just over 5.5%, higher oil prices and a widening current account, the chance of further cuts in domestic interest rates have diminished. The derivative market moved from pricing in a 65% chance of a 1% cut in interest rates to pricing in no cut at all.

Going forward, we believe that the SARB will keep rates on hold and that the market is now more fairly priced. The global environment remains a risk and the current account is still a source of concern. We believe that money market yields will likely rise towards the latter half of the year and that cash yields offer better value in the short end of the curve.

The Monetary Policy Committee kept rates on hold at the December MPC meeting, maintaining the repo rate at 7.50% and delivering a balanced MPC statement. The market, having priced in a rate cut, was disappointed in the news and the 12mth NCD rose 0.15%. Upward pressure was also exerted in the very short end of the curve as December remains a tight month for liquidity, with 1month fixed deposits trading close to the repo rate. A strong Rand and bond market towards the end of December led the market to once again anticipate further interest rate cuts, pricing in a 80% chance of a further 0.50% cut in February. We were well positioned for the month, reducing our long position into any strength.

Going forward, we continue to expect inflation to remain within the 3- 6% target band and for interest rates to remain on hold for the 1 st half of 2005. We believe that the market has priced in most of the good news and the long end of the curve is looking expensive. We will maintain our defensive positioning and will look to add exposure to the short end of the curve.