At first glance it would appear that yields did not move during the first quarter of the New Year. The bond market finished the quarter at similar yields to those of December 2005. Within the quarter there was some volatility and we saw yields trade down to historic lows (high in price). As expected the large coupon payments in February offered some support to the bond market and pulled yields down to around 7%. With cash rates also at these levels, it was not surprising that the longer dated bonds could not sustain these low levels, thus we saw a small sell-off in yields towards the end of the quarter.

The Rand continued to trade within a narrow range and with the support from the higher gold price, made another assault on the R6.00/USD level. In March we saw some risk aversion return to emerging markets and this caused most of the currencies in the emerging market stable to depreciate. Despite this trend, the commodity prices continued to give the currency a strong under pin and we saw the Rand finish the quarter around R6.10/USD.
The inflation story continues to be positive with the February CPIX inflation release coming in at 4.5%, which was slightly lower than the market was expecting. While inflation continues to be a positive driver for the bond market, the continued robust consumer demand is pushing credit levels up to levels that caused the Governor of the Reserve Bank to warn the market that interest rates would need to be hiked if the economy showed signs of over heating.

The international front was more negative for our market as both the US Federal Reserve and the European Central Bank hiked their policy rates. Furthermore, we saw the Bank of Japan announce that they may also start hiking rates again. These hikes resulted in our market been kept in a narrow range.

The narrow trading range not withstanding, we still managed to outperform the ALBI with active management of the duration in your portfolio. We started the year with a positive outlook for the bond market and took a over weight duration position going into the budget. Once again the minister of finance delivered a positive budget and also reduced retirement fund tax. This caused the bond market to rally and we used this opportunity to take some profit and to reduce the duration position in your portfolio.

Other than the crucial duration decision, we also make use of various curve and slope strategies to enhance your fund performance. In particular our strategies for the flattening of the yield curve and the out performance of the 'humped' area of the curve in the 10-14 year maturity area continued to add extra performance. We did reduce this position over the quarter and now have a more neutral position across the curve.

The outlook for bonds is being driven by conflicting local and international forces. On the local front, inflation is benign and we forecast that we have seen the peak for this year at 4.5%. The next few readings could even be below 4%. This should make the SA Reserve Bank very relaxed about leaving interest rates on hold. However, the SA consumer is enjoying the low interest rate environment and is continuing to spend at a rate that is indeed causing some concern in the corridors of the SARB. We continue to expect interest rates to be kept on hold for the remainder of the year.

The international outlook is slightly different with most central banks being in a tightening phase which should put upward pressure on interest rates. As global rates continue to rise, our relative attractiveness diminishes, and we could well see some sell off of our bond yields. As a result of these concerns we are currently underweight in our allocation to bonds.

The Rand should continue to be supported by the commodity prices which will also lead to a more stable outlook for our bonds. Should bond yields sell off in the near term we would use that opportunity to increase the duration in your portfolio as the outlook for interest rates in the second half of 2006 is positive. We will continue to actively manage the duration of the portfolio within the expected narrow range in yields.