Bond and money market yields fell in October as investors began to price in the possibility that short-term interest rates have now peaked. Having increased duration recently, the portfolio was well positioned for such an outcome. Looking ahead, the fund managers believe that bonds will continue to rally as they move past the peak of inflation. Limited supply of new bonds and, in general, low bond weightings in most domestic portfolios will add further support to the market. The fund managers will use any near-term volatility to add to their bond exposure. The portfolio continues to be managed conservatively with regard to interest rate and credit risks.

Bond yields rose marginally on average in September, and the yield inverted sharply as short-dated bonds reacted negatively to the hike in the Repo Rate. The fund was reasonably well positioned for such a move.

In the short-run, the risks to inflation and interest rates remain on the upside and at current levels bond yields appear to be pricing in a rapid reversal of this year's inflation shock. As a result, we are maintaining a defensive duration stance, but do not expect major bond market weakness, given the favorable balance of supply and demand, thanks to government's intention to redeem a portion of its domestic bond issuance. In addition, the outlook for next year is bright, with both inflation and ultimately interest rates both likely to fall significantly. We will, therefore, use any market weakness to increase bond exposure in anticipation of a rally into the new year.

The fund continues to be conservatively managed with respect to interest rate and credit risks.

Bond yields and money market interest rates rose quite sharply during August as investors were unsettled by worse than expected inflation data.

The portfolio was somewhat defensively positioned and this will have benefited performance during the month.

Looking ahead, renewed uncertainty over the direction of monetary policy is likely to lead to significant bond market volatility in the near-term and provide attractive opportunities in the money market. Against this background, bond yields still appear to be too low, but any rise may be limited by limited new bond supply and expectations that inflation will improve sharply next year.

As a result, the fund managers are maintaining a moderately underweight duration stance and will look to increase bond exposure into weakness. The Fund continues to be managed conservatively with respect to interest rate and credit risks.

The bond market rallied sharply during the second quarter, despite an increase in short-term interest rates. The fall in bond yields was driven by buying by annuity funds and by foreigners encouraged by the recovery in the Rand. For bond yields to peak 7 months ahead of inflation is unprecedented in the history of the South African bond market. During the quarter, we retained a defensive duration stance. At current yields we believe that the bond market has rallied too far too fast in anticipation of an unwinding of this year's rise in inflation and interest rates. Near-term, risks remain regarding the outlook for inflation, interest rates and the Rand. Any sell- off, however, is likely to be limited by the approach of the peak in CPIX and the low level of bond exposure in most balanced funds. CPIX should peak in October just below 10% and then decline sharply, reaching the upper end of the Reserve Bank's inflation target by the second quarter of next year. This will allow the bond market to resume its rally and we will look to adopt a more aggressive duration stance within the 2 year limit later this year as the opportunity arises. The fund continues to be managed conservatively with respect to interest rate and credit risks.

Bond yields fell sharply during April. The Fund had a moderately defensive duration exposure, given the risk of higher inflation and interest rates, and this limited performance in the short run. The move lower in yields was driven by demand from insurance funds for long-dated bonds and renewed buying by foreigners encouraged by a strengthening Rand. The fall in yields was exacerbated by the very low bond weightings of most local investors. At current levels bonds appear to be pricing too rapid a decline in inflation. As such, we believe that they are vulnerable to further weakness in the near-term and the fund manager has positioned the Fund accordingly. That said, however, given the favourable supply situation, the fund manager expects any sell-off will be limited and will look to lock in higher yields as they become available. The Fund continues to be managed conservatively with regards to both interest rate and credit risks.