During the past quarter, we changed the interest rate risk position in the fund from being long relative to the All Bond Index (ALBI) to being short relative to the index. This was largely on the back of increased government issuance and sticky inflation expectations, which we believe will cause bond yields to weaken. We allowed the technical factor of index lengthening to take us shorter during August, by not buying bonds at that time. In addition, we switched from the 12+ year sector of the yield curve to the seven to 12- year area of the curve.

Corporate/parastatal debt continues to offer great value at current spreads. Issuer selection remains key, with the aim of getting the highest yield pickup linked to the highest credit quality. We still favour longer dated municipal and parastatal debt, and will continue to add to these positions as opportunities present themselves.

The fund maintained a small duration tilt around the All Bond Index (ALBI) with emphasis on yield curve positioning and opportunities offered by the non-government debt market. The view on continued yield curve normalisation causes us to favour exposure to the seven to 12-year sub-sector of the ALBI. We performed a number of neutral duration switches which increased the fund's holding to non-government debt in general, and certain state-owned entities in particular.

The bond market ended the first quarter of 2009 considerably weaker. The yield of the 10-year RSA government bond retraced from 7.3% at the end of 2008 to 8.6% on 31 March 2009. The weakness was caused by a number of factors. Firstly, the bond market started the year at very expensive levels following the sharp bull rally during December 2008. Secondly, the local market tracked weakening developed bond markets. Local investors also had to brace themselves for a higher than expected national budget deficit estimate for the forthcoming fiscal year. National Treasury projects a deficit of 3.8% of Gross Domestic Product (GDP), which will impact the market through a sharp increase in net new issuance of long-dated loans during the 2009/10 fiscal year.

The South African Reserve Bank (SARB) reacted to global events, a slowdown of local economic activity and lower inflation by lowering the repo rate by 200 basis points (bps) at the two meetings held in February and March respectively. However, this had been anticipated by the market and was thus overshadowed by events described above.

The market is currently caught in a trading range of around 150bps and, as indicated before, we will continue to cautiously trade the expected range the way it was done during the first quarter of 2009.

The Old Mutual Gilt Fund has changed its name to the Old Mutual Bond Fund with effect
from 1 April 2009.

Bond yields plummeted during the fourth quarter of 2008 to outperform cash by a significant margin. Although bonds weakened early in the quarter in line with the weak rand, they reversed their losses quickly as the global recession trade gained momentum. A powerful wave of disinflation was met with widespread fiscal and monetary policy easing across the globe. The US 10-year Treasury bond declined by 160 basis points (bps) during the quarter to end the year at 2.18%. Locally, the bond bull market was further fuelled by declining inflation and the 50 bp reduction in the repo rate in December, as well as expectations of further sharp declines in both inflation and short term interest rates in 2009. The fund increased exposure to interest rates by buying medium-dated RSA bonds as well as short-dated corporate bonds (which were offered at attractive spreads in anticipation of lower inflation earlier in the quarter), and benefited handsomely from the bull rally. We feel that the bond market is currently trading at expensive levels and warrants a cautious stance going forward into 2009.