Market and portfolio review
Money market yields rallied sharply after the Reserve Bank surprised the market with a 0.5% interest rate cut at the August monetary policy committee meeting. After interest rates were kept on hold in June, the market had started to anticipate the end of the cutting cycle and was indeed surprised by a further interest rate cut. In response, 12-month NCDs rallied 0.43% after the announcement. Gill Marcus, chairwoman of Absa group and former deputy governor of the Reserve Bank, was appointed as the new governor of the Bank. Given her strong credentials, the market took the news as a positive development. It does, however, add another element of uncertainty for monetary policy going forward. During the quarter, the shape of the curve continued to steepen with the long end of the bond market still concerned over increased issuance and the short end rallying in response to the rate cut.

Portfolio activity
Given the benign July inflation data and weak growth numbers, we believed the possibility of a further cut in August had increased. In order to mitigate some of this risk, we lengthened duration slightly, increasing exposure to the longer end of the yield curve. We were therefore reasonably well positioned for the move. Bank issuer spreads remained under pressure and we continued to take advantage of this opportunity.

Portfolio positioningThe decision to keep interest rates on hold in September was in line with our expectations and the broader market's views. Going forward, we see the repo rate on hold from here. Although valuations at the long end of the yield curve have improved, we still prefer the shorter end of the yield curve for now. The portfolio is therefore positioned with a bias towards the shorter end of the curve.

Market and portfolio review
The second quarter saw the release of poor GDP data, the biggest decline in growth since 1984 and confirmation that South Africa had entered its first recession since 1992. This caused the short end of the cash curve to rally aggressively, as the market anticipated a deeper and sharper rate-cutting cycle. By the end of May, derivatives were pricing in a repo rate of below 6.5%.

Against a deteriorating domestic growth backdrop, the South African Reserve Bank (SARB) took further action, cutting interest rates by 1% at both the April and May monetary policy committee (MPC) meetings. This brought total interest rate cuts to 4.5% since the start of the cycle.

In June, however, the SARB surprised the market by keeping rates on hold, signalling the end of the rate-cutting cycle (at least for now). This led the market to retrace from the exuberant levels priced in at the end of May, with the 12-month NCDs moving 0.75% higher to end the quarter at 8.40%. During the quarter, the shape of the curve steepened somewhat with the long end of the bond market driven up by concerns over increased issuance and the short end rallying in response to rate cuts.

Portfolio activity
With the market having priced in significant rate cuts during the quarter, we believed that the long end of the cash yield curve offered little value. Duration was reduced during the quarter and we remained invested mainly in the short to medium end of the yield curve. We were well positioned for the move. Bank issuer spreads remained under pressure and we continued to take advantage of this opportunity.

Portfolio positioning
We believe that inflation will remain sticky in the shorter term, with the possibility of surprising on the downside over the longer term. Interest rates are likely to remain on hold for now. With the retracement in yields, we believe the curve is now more reasonably priced. However, we continue to prefer the shorter end of the yield curve, but will look out for opportunities going forward.

Market and portfolio review
The first quarter of 2009 was marked by aggressive interest rate cuts across the globe, as policy makers responded to a sharply slower global economy. Concerns of a domestic recession and the weak global backdrop moved the South African Reserve Bank (SARB) to cut interest rates by 100 basis points at both the February and March Monetary Policy Committee (MPC) meetings. The SARB surprised the market by increasing the frequency of MPC meetings to monthly and bringing forward the next scheduled meeting, effectively implementing an emergency meeting in March. The market interpreted the move to mean that interest rates would be lowered earlier than expected this year, and at a much faster pace than previously anticipated. Consequently, cash yields rallied aggressively, especially at the shorter end of the curve.

hree-month rates ended the quarter at 8.8%, while one-year cash yields fell to 8.4% discounting aggressive easing in interest rates going forward. The strong performance of the longer end of the cash curve continued to be a primary contributor to the outperformance of the portfolio over the quarter.

Portfolio activity
The duration of the portfolio was broadly unchanged during the quarter. We continued to take advantage of the wide spreads offered in the three-month area of the curve and on one-year floating rate bank paper. We added a small amount of fixed rate exposure into weakness in order to protect the portfolio from aggressive rate cuts going forward.

Portfolio positioning
Domestic data could continue to be disappointing and inflation could remain sticky on the way down. However, we believe that the SARB will focus more on growth than inflation and that there is scope for further aggressive interest rate cuts going forward. The market has moved to discount another 2.5% cut in rates from here. Given the amount of easing already priced into the money markets, we believe on a risk-reward basis, the longer end of the yield curve no longer looks attractive. We will continue to invest predominantly in the short end of the yield curve.

Market and portfolio review
In October the global liquidity crisis caused a massive sell-off in equity markets and emerging market currencies. The global economy faltered and risk aversion reached record highs. This caused cash yields, particularly the longer dated area of the curve, to rise sharply. The next two months saw the money market resume its bull run as yields collapsed well through September's closing levels. Global economic data deteriorated apace, and local South African data also pointed to a sharply slowing economy. The South African Reserve Bank (SARB) cut interest rates 50 basis points in December. Threemonth rates ended the quarter at 11.43%, while one-year cash yields fell to 9.8%, discounting a substantial interest rate easing cycle in 2009. Cash, as measured by the STeFI, rose 2.9% over the quarter and 11.7% for the year. The strong performance of the longer end of the cash curve continued to be a primary contributor to the outperformance of the Investec Money Market Fund over the quarter.

Portfolio activity
The duration of the portfolio was kept largely unchanged through October and November. However, as the market discounted aggressive easing in December, we allowed the duration to shorten slightly, believing the longer end of the curve no longer offered good value. As markets settled towards the end of the year, we selectively added some floating rate bank paper at attractive spreads over threemonth Jibar. We also increased our exposure to three-month conduit and corporate paper, taking advantage of the wide spread levels offered there.

Portfolio positioning
The market is still reeling from the effects of the global credit crisis and the dramatic economic slowdown. The level of risk aversion has declined from the extreme levels seen in October. However, market sentiment is still fragile and the full economic extent of the slowdown will continue to be felt in the coming quarters. Emerging markets such as South Africa will remain susceptible to recurring bouts of risk aversion, keeping the rand vulnerable and volatile. The SARB has begun to cut interest rates, with a modest 50 basis points in early December. As the huge scope of the economic slowdown has continued to manifest itself both locally and internationally, the domestic market has quickly moved to discount a full 4% of interest rates cuts in 2009.

Your portfolio will underperform in response to an aggressive sell-off in the rand, if this leads to higher inflation and an unwinding of some of the interest rate cut expectations built into the market. As we have also increased our exposure to floating rate bank paper, we are vulnerable to a renewed widening in credit spreads and bank spreads in particular.