Market and portfolio review
Money market yields rallied aggressively during the quarter, driven mainly by the 50 basis point cut in the repo rate at the July monetary policy committee meeting. Although a high probability of a rate cut was already priced into the market by the forward rate agreements (the market's speculation of where 3-month rates will be in the future), most economists had expected the repo rate to remain on hold. The South African Reserve Bank (SARB) is clearly concerned about the deterioration in the global economic outlook and the downside risk that this poses to South Africa. This concern was again conveyed in the September monetary policy committee statement where the tone of the comments was overly dovish. One-year negotiable certificates of deposits fell 55 basis points to end the quarter yielding 5.4%. Cash delivered 1.3% over the quarter and 5.5% over the past 12 months, as measured by the STeFI 3-month Index. Going forward, the move in policy rates will depend on data. Although our central case is for the repo rate to remain on hold, the risks are clearly skewed to the downside. Widespread strike action is a further concern against an already weak growth backdrop. Inflation is now firmly back in the target band and remains under control, despite some upside risks from food. Rating agency Moody's downgraded South Africa's sovereign rating to Baa1 from A3. The move was neither unexpected nor unjustified in the light of policy uncertainty. The new rating brings Moody's in line with that of Standard & Poor's and Fitch. The trade and current account balances released were wider than expected and remain a concern for the SARB. All these factors are likely to weigh on the rand, keeping it vulnerable. After having taken the portfolio's duration slightly longer during the course of last quarter, we benefited from the decline in yields. The portfolio performed in line with its benchmark over the quarter.

Portfolio activity and positioning
Our positioning remains broadly neutral. Since the market has moved aggressively lower, we see rates as more fairly valued to slightly expensive. On a risk-reward basis we prefer the shorter to medium end of the curve. We continued to selectively add bank floating-rate notes at the current attractive spreads, allowing for some yield enhancement in the portfolio.

Market and portfolio review
Money market yields rallied aggressively during the quarter, with a significant turnaround in interest rate expectations. The short end of the market moved from pricing in interest rate hikes to pricing in a high probability of interest rate cuts, as developments in Europe led the market to become concerned over the global growth outlook. One-year negotiable certificates of deposits (NCDs) fell 34 basis points to end the quarter yielding 5.95%. Cash delivered 1.3% over the quarter and 5.5% over the past 12 months, as measured by the STeFi 3-month Index. Global economic data generally disappointed and monetary policy remained accommodative. Domestically, we continue to see a somewhat slower recovery with inflation remaining well under control. The data is broadly consistent with our view that rates are likely to remain on hold well into next year. Due to the deterioration in the global growth outlook and the uncertainty around Europe, the possibility of a further cut in the repo rate has increased. We will keep a close watch on global activity data. Your portfolio was well positioned for the decline in yields and gained 1.3% over the quarter.

Portfolio activity and positioning
After having taken the portfolio's duration longer at the beginning of this quarter and during the course of last quarter, we were well positioned for the rally in rates. Since the market has moved aggressively lower, we see rates as more fairly valued to slightly expensive. Hence, we prefer the shorter end of the curve for now. We continued to selectively add bank floating-rate notes at attractive spreads.

Market and portfolio review
Money market yields edged higher during the quarter, driven by the long end of the curve. The 1-year negotiable certificate of deposit (NCD) kicked up 17 basis points to end the quarter yielding 6.28%. As expected, the monetary policy committee kept rates on hold. The South African Reserve Bank marginally lowered its inflation forecasts, but raised its growth forecasts. The statement was fairly balanced and supports our view that rates will remain on hold for longer. Your portfolio was well positioned for the move in yields and gained 1.3% over the quarter.

Portfolio activity
Duration was slightly increased during the quarter as we took advantage of a reasonably steep yield curve by adding exposure to the middle area of the curve. Overall, we remain cautiously positioned. We selectively added bank floating-rate notes during the quarter.

Portfolio positioning
We see inflation remaining under control and the breach of the target band as temporary. Inflation should come back into the band in the second half of this year. We expect the Bank to start hiking rates in the early part of 2013. With the move to higher yields, the market is fairly valued. Global developments will likely continue to create bouts of volatility. We will look for opportunities to take advantage of a steeper yield curve as we move closer to the start of the hiking cycle.

Market and portfolio review

Money market yields moved higher during the quarter, driven by a steepening yield curve. The long end of the curve moved 25 basis points up to end the year yielding 6.11%.

High levels of volatility persisted during the quarter as our markets continued to be driven by global events. Uncertainty around the European debt crisis has heightened the markets' sensitivity to developed market news flow. Consequently, our markets have traded along with other risk assets, oscillating between risk-seeking and risk-aversion modes. At the height of the negative sentiment, the short end derivatives kicked up by over 100 basis points. From pricing in an 80% chance of an interest rate cut they moved to price in interest rate hikes. The South African Reserve Bank kept rates on hold during the quarter, adding to the negative sentiment.

The Investec Money Market portfolio was well positioned for the move in yields and gained 1.3% over the quarter.

Portfolio activity

We took advantage of a reasonably steep yield curve by adding exposure in the middle area of the curve, but remained cautiously positioned overall. We continued to selectively add bank floating-rate paper.

Portfolio positioning

Inflation rose to 6.2%, breaking through the 3%-6% target band. We see this as a temporary breach with inflation coming back down within the band in the first half of this year. The currency continues to pose upside risk to inflation, whilst growth remains a concern with the significant events taking place in Europe. We expect to see rates on hold until at least the final quarter of this year.

Global developments are likely to continue to be the main drivers of sentiment and we expect the volatility to persist. With the move to higher yields, we see the market as more fairly valued. We will be on the lookout for further opportunities to take advantage of a steeper yield curve.