Market and portfolio review
Money market yields rallied aggressively during the third quarter, with the one-year NCD moving 0.84% lower to end the quarter yielding 6.42%. The rally was driven by a further 0.5% cut in the repo rate and foreign inflows into our interest rate market. Renewed concerns over global growth and the search for yield resulted in record inflows into our market, as foreign investors allocated a larger portion of pension fund assets to emerging markets.

Portfolio activity
With the risks of a further interest rate cut having increased, we took some protection on the portfolio, locking into longer term fixed exposures at higher yields. We were thus well positioned for the rally. We also locked into one-year floating rate spreads. These spreads continue to fall dramatically with the banks managing to raise a significant amount of term funding, coupled with a delay in implementation of the new liquidity regulations.

Portfolio positioning
Inflation continues to surprise the market on the downside. If the currency remains at current levels of around R7 to the dollar, it is highly likely that we will see a continuation of this positive trend. Our view is that the market is fairly valued with the risks tilted towards a further interest rate cut being priced into the market. We will look for opportunities to take the fund slightly longer into weakness.

Market and portfolio review
After a surprise interest rate cut and aggressive rally last quarter, money market yields were slightly firmer with the one-year NCD moving 0.22% lower to end the quarter yielding 7.25%. The rally was driven by the longer end and in the process we saw a flattening of the yield curve. Globally, renewed fears of a slowdown in growth emerged with investors placing a higher probability on the chances of a double-dip recession. On the domestic front, the market became more concerned as we saw four consecutive months of a moderating Purchasing Managers Index which has now dipped below 50. Activity data together with comments by the South African Reserve Bank Governor, Gill Marcus, have increased the probability of a further interest rate cut.

Portfolio activity
After adding longer-dated exposure last quarter and with the market having already rallied significantly, we invested mainly in the shorter end of the yield curve. We also continued to take advantage of the wide bank issuer spreads.

Portfolio positioning
We are close to or at the bottom of the interest rate cycle and your portfolio is positioned with a neutral to slightly short bias. Although the risks of a further interest rate cut have increased, from a risk-reward basis we still prefer the medium to shorter end of the yield curve. As the market looks for the turning point in the interest rate cycle, we expect yields to be volatile and will seek opportunities to take advantage of this volatility. Although spreads have compressed somewhat, your portfolio has benefited from locking into wide spreads on bank floating rate notes.

Market and portfolio review
Money market yields rallied aggressively during the quarter as the South African Reserve Bank surprised the market with another 0.50% interest rate cut. After keeping interest rates on hold since August last year, the market had expected the end of the easing cycle. Oneyear NCDs rallied 0.72% and three-month NCDs moved 0.56% lower to end the quarter yielding 7.48% and 6.67% respectively. The rand was firmer towards the end of the quarter in line with the broader emerging market currency move. Currency strength appears to have been an important factor in the South African Reserve Bank's decision to cut interest rates and it certainly bodes well for inflation going forward. Inflation continued to surprise the market to the downside during the quarter. We remain far more positive on inflation than both the Bank and market consensus and believe that we will see inflation move comfortably towards the middle of the target band by the middle of the year. Although we are of the opinion that we have now reached the bottom of the interest rate cycle, we cannot rule out the market pricing in a further rate cut.

Portfolio activity
Given our view that there was a high probability of a further interest rate cut, we added longer-dated exposure to the portfolio during the quarter. We were thus well positioned for the move. We also continued to take advantage of the wide bank issuer spreads.

Portfolio positioning
We are close to or at the bottom of the interest rate cycle and your portfolio is positioned with a neutral to slightly short bias. The market has rallied quickly and sharply and for now we prefer the shorter end of the yield curve. Your portfolio has benefited from locking into wide spreads on bank floating rate notes.

Market and portfolio review
After a sharp rally in money market yields in the first half of the year, yields were broadly unchanged during the final quarter with 12-month NCDs ending the year yielding 8.19%. Since the start of the cycle (December 2008), we have now seen a cumulative cut in interest rates of 5%, as the Reserve Bank took action to help stabilise the economy. We are now close to or at the bottom of the easing cycle. Reserve Bank Governor Gill Marcus delivered her first monetary policy committee (MPC) statement in November, keeping interest rates on hold. The style of the new governor will likely be a lot more engaging across a broad spectrum of stakeholders and the emphasis will be on maintaining a clear communication strategy. For the first time in 31 months, inflation fell back into the target band for two consecutive months in a row. Over the next two months we expect inflation to bounce back out of the target band on a technical basis and thereafter to stay well within the target band in 2010. We are far more positive about inflation than both the Reserve Bank and the consensus view and believe another interest rate cut could be on the cards. Unsurprisingly, the December MPC meeting was cancelled (it fell on a public holiday) and the MPC reverted to meeting every second month in 2010, which caused some movement along the curve.

Portfolio activity
Given that we believe the risks of a further interest rate cut have increased, we added a small amount of longer-dated exposure into weakness during the quarter. We continued to take advantage of the wide bank issuer spreads.

Portfolio positioning
We are close to or at the bottom of the interest rate cycle and your portfolio is positioned with a shorter bias. We expect some volatility at this uncertain stage of the cycle and will look for opportunities to invest further into weakness. Your portfolio has benefited from locking into wide spreads on bank floating rate notes.