Market and portfolio review
After a relatively muted start to the year, money market yields moved substantially higher during the second quarter. The period was characterised by a sharp increase in volatility as assets reacted to central bank rhetoric. Initially, positive sentiment prevailed, thanks to unprecedented monetary policy easing by the Bank of Japan. However, US Federal Reserve (Fed) Chairman Ben Bernanke's statement that the Fed may consider reducing its current bond-buying programme sparked a significant sell-off in yields. This led to the 12-month NCD selling off 80 basis points from May lows. The rand was one of the worst performers of a basket of major currencies as risk assets sold off in tandem. The All Bond Index lost 2.3% over the quarter. Bernanke's "tapering talk" (scaling back asset purchases) signals a fundamental shift in dynamics. The tailwinds that have driven global yields sharply lower over the last five years are likely to be less supportive in future. The turnabout in expectations was evident in the forward rate agreements, which started to price in aggressive rate hikes after having priced in a high probability of a further interest rate cut in May. On the local front, the weaker rand could result in CPI breaching the top end of the target band and remaining at around the 6% level. Growth and activity levels will continue to be a concern, leaving the South African Reserve Bank to weigh up higher inflation against a weak growth backdrop. Our central view is for rates to remain on hold for longer.

Portfolio activity and positioning
Although tailwinds have shifted, we believe the move in yields is overdone in the short term and that on a fundamental basis, money market yields are showing value. We added a small amount of long-dated exposure to the portfolio into weakness. However, we continue to be cautious as momentum is high and volatility is likely to persist. Overall, we remain neutrally positioned.

Market and portfolio review
After a rally in money market yields last year, yields started to drift upwards in the first quarter of 2013. The 12-month NCD kicked up 21 basis points over the first three months of the year, as the market became concerned over higher inflation and the monetary policy committee moving to a more neutral stance. Inflation surprised to the upside in March, reaching 5.9%, versus the expected number of 5.6%. Most of the surprise was in the services component. Inflation has troughed and will likely breach the upper end of the target band. We view the breach as temporary and inflation benign overall. Nevertheless, inflation has become more of a concern, especially with the currency at much weaker levels. The rand was one of the weakest currencies over the quarter, plagued by labour strikes and a worsening current account deficit. The monetary policy committee kept rates on hold at both the January and March meetings. Although the South African Reserve Bank's outlook remains neutral, the tone of the statement has become more hawkish relative to previous meetings. There are some positive signs that global growth is improving, but domestic growth remains a concern. The market has now priced out any hope of a further rate cut. We continue to believe that rates should remain on hold, as the South African Reserve Bank weighs up inflation risks against a weak economic growth backdrop. Cash, as measured by the STeFi 3-month Index, returned 1.2% for the quarter, outperforming the All Bond Index which returned 1% over the period. The portfolio performed in line with its benchmark over the quarter.

Portfolio activity and positioning
The portfolio is neutrally positioned with exposure mostly concentrated in the medium to shorter end of the yield curve. We continue to favour bank floating-rate notes, but remain selective. With the yield curve having steepened, we will look for opportunities to move slightly down the curve, taking advantage of the steepness. Overall positioning will remain neutral.

Market and portfolio review
After an aggressive rally in money market yields over the year, the final quarter saw 12-month yields kicking up 7 basis points to end the year yielding 5.46%. Banks paid up for short-term funding into year-end as cash was in high demand over the festive season. This resulted in the 3-month Jibar rate increasing from 5.075% to 5.125% ? a fairly big move, given the stability in the rate over the last couple of months. Cash, as measured by the STeFi 3-month Index, returned a meagre 5.34% for the year and 1.23% over the quarter. In contrast, the bond market generated strong returns, with the All Bond Index gaining 16% over the year and 2.6% for the quarter. Bond outperformance of cash is at an all-time high. We are unlikely to see a repeat of this performance in 2013. The monetary policy committee kept rates on hold in November and although it was a balanced statement, the tone was more hawkish compared to previous meetings. This led the market to price out the possibility of a rate cut. Before the meeting, the market had priced in a 30% probability of a further rate cut. Inflation generally disappointed over the quarter, with the negative surprise mostly as a result of a higher food component. Inflation has clearly troughed and we expect it to remain around the upper end of the target band for the most part of 2013. On the growth front, the broad-based slowdown in economic activity is more of a worry. Trade data and the current account are still a concern and could weigh on the rand. We expect interest rates to remain on hold in the near term, but the direction of rates will be largely data dependant. The portfolio performed in line with its benchmark over the quarter.

Portfolio activity and positioning
We took advantage of the rise in yields over the quarter and increased the portfolio's exposure to the middle part of the curve. Duration was increased during the quarter, but our overall positioning remains broadly neutral with exposure mostly concentrated in the medium to shorter end of the curve. With yields having rallied into the final month of 2012, we view the market as fairly valued. We continued to selectively add bank floatingrate notes during the review period.