The bond market rallied again during the month of October, and the benchmark RSA R153 traded down to make another all time low in yield at 8.43% during the month. Inflation continued to surprise on the downside, with September CPIX coming in unchanged from the August low of 3.7% year-on-year. Although inflation is expected to start to rise from these levels, it will still remain comfortably within the Reserve Bank's target range for the next 12 months. The benign inflation environment should continue to provide support to the bond market, and we expect interest rates to be on hold for the next year. The rand also strengthened during October, firming to around 6.10 to the US dollar buoyed by good news on the sovereign ratings front and positive investor sentiment. The yield curve flattening that started in September continued into October and longer dated bonds again outperformed the short dated bonds.
Although the current account remains a source of some concern, we only expect this to result in a modest depreciation of the rand. The global environment however, is more uncertain, and the risks remain that global rates rise and exert some pressure on the local market. As these risks balance against the positive domestic backdrop, we expect the bond market to range trade for the remainder of the year.

The bond market remained firm during September, with the RSA R153 trading down to an all time low in yield of 8.58%. Inflation continued to remain under control as the August CPIX was released at 3.7%. Inflation should rise from these levels, but will still remain comfortably within the Reserve Bank's target range for the next 12 months. This benign inflation environment will continue to support the bond market, and we expect interest rates to be on hold for the next year. Furthermore, the Rand has been more stable and traded around the 6.50/$ level. The yield curve started to flatten with longer dated bonds outperforming the short dated bonds.

Although the current account remains a source of some concern, we only expect this to result in a modest depreciation of the Rand. The global environment however, is more uncertain, and the risks remain that global rates rise and exert some pressure on the local market. As these risks balance against the positive domestic backdrop, we expect the bond market to range trade for the remainder of the year.

The yield curve steepened somewhat in June, which was another volatile month for the South African bond market. Bond yields initially sold off some 30 basis points before rallying strongly in the second half of the month, ending 9 basis points lower than at the end of May.

In the near term, the outlook for the Rand remains supportive, while both local and international short term interest rates should continue to underpin the bond market. Looking further out, however, the risks to the international bond markets remain a concern. Domestic fundamentals will remain largely supportive, with inflation likely to remain broadly within the target range this year and official interest rates only expected to rise next year. On balance, we do not expect to see bond yields rally substantially and will maintain a defensive position with the expectation that yields will move higher.

Bond yields continued to rise during the month of May and the yield curve steepened despite a strengthening Rand. The market focussed on global bond yields as international markets increasingly discounted interest rate hikes. We expect domestic inflation to ri se this year, exceeding the upper end of the target band towards the end of the year and early next year. This is in response to higher oil prices and the unwind of last year's favourable base effects. The market is now pricing in rate hikes in excess of 3.5% over the next two years. Although South African bond yields look reasonably priced for the domestic fundamentals, risks in the international arena remain some cause for caution. The fund has therefore increased its underweight duration position and will continue to remain underweight until the global picture improves.

Bond yields continued to rise during the month as the Rand weakened and the international backdrop for bonds deteriorated. The yield curve flattened, suggesting that investors are becoming slightly more concerned about a hike in the repo rate than about inflation. The market is now pricing in rate hikes of 100bpts by year end and a further 100bpts in a year's time. The fund has maintained its underweight duration position and will continue to remain on the underweight side until the global picture improves. SA bond yields are fairly priced for the domestic fundamentals, but the risks remain to the upside in yields from the international front. Domestic inflation is expected to continue rising this year towards the upper end of the target band, which could cause interest rates to be hiked in the latter half of 2004.

Bond yields rose modestly during December after the MPC surprised investors with a smaller than anticipated interest rate cut of only 50 basis points. The fund was reasonably well positioned with a short duration position. The near-term outlook for the market remains positive. Inflation is low and the Rand continues to be supported for the time being by US Dollar weakness. Cash flows will also provide support in the first quarter.

Further out, the risks to the bond market are rising. Inflation and interest rates are close to a cyclical trough and should rise this year. The latest trade data suggests that the current account may become difficult to finance. The international backdrop also looks challenging. On balance, we do not expect a further substantial rally in bond yields and will use near-term strength to adopt a more defensive position.

The fund is managed conservatively with regards to credit and interest rate risk.