The All Bond Index (ALBI) produced another strong performance of 5.0% for the quarter ended 30 September 2012. The yield of the benchmark R208 Government bond traded from a high of 7.215% at 30 June 2012, to end the quarter at a yield of 6.525%. The main drivers of the strength in the local bond market remained the same as the previous quarter: South Africa's expected inclusion in the World Global Bond Index (WGBI); the relative attractiveness of local yields to those in developed markets; and the actual reduction in the repo rate by the South African Reserve Bank (SARB)'s Monetary Policy Committee at their July 2012 meeting.

The seven- to 12-year sector of the yield curve produced the best performance during the quarter with the 12+ sector in a close second place. The Barclays/ABSA Government Inflation-linked Bonds Index returned 8.5% for the quarter, thus significantly outperforming nominal bonds and cash. We added some exposure to inflation-linked bonds during the quarter. In terms of the credit market, listed fixed rate medium-term bond auctions remain few and far between, and this does limit our ability to add significantly to the credit exposure in the fund. In addition, we remain selective in terms of buying credit risky assets, as credit spreads continue to tighten.

The fund positioning is in line with our investment view, which is to be underweight to fixed rate bonds.

The All Bond Index produced a whopping 5.2% for the quarter ended 30 June 2012. The yield of the benchmark R208 government bond traded from a high of 7.86% at 30 March 2012, to end the quarter at a yield of 7.215%. The main catalyst for the strength in bond yields is foreign participation in the local market, driven by three main factors, South Africa's inclusion in the World Global Bond Index (WGBI); the relative attractiveness of local yields to those in developed market; and the probability that the South African Reserve Bank (SARB)'s Monetary Policy Committee (MPC) will cut rates at the next meeting in July 2012.

The 7-year to 12-year sector of the yield curve produced the best performance during the quarter, with the 12+ sector a close second place. Inflation-linked bonds returned -1.5% for the quarter, thus under-performing nominal bonds. We neutralised our exposure to inflation-linked bonds during the quarter. While we have seen a fair amount of corporate debt come to the market, most of the debt is short-term money market paper or floating rate notes, and fixed rate medium-term credit assets remain in short supply. In addition, we remain selective in terms of buying credit risky assets, as credit spreads continue to tighten.

The fund positioning is in line with our investment view, which is to be overweight fixed rate bonds.

The All Bond Index produced uninspiring returns of 0.12% and 2.4% respectively for the month and quarter ended 31 March 2012, albeit with a fair amount of volatility during the period. The yield of the benchmark R208 government bond traded to a high of 8.14% and ended the quarter with a yield of 7.86%. The 12+ year sector of the yield curve produced the best performance during the quarter, which is in line with our positive outlook for this sector of the index.

Inflation-linked bonds returned 1.15% and 2.7% over one and three months respectively, thus outperforming nominal bonds. We reduced some of our exposure to this asset class into strength during the quarter while still maintaining our overweight position. Fixed rate term credit assets continue to be quite scarce. A few new issues entered the market during the quarter with the term of many of these issues being longer than five years. In terms of the fixed rate credit issued by the banks, the increased term is partly due to changes in regulations encouraging banks to secure longer term funding, and we expect this trend to continue going forward.

The fund positioning is in line with our investment view, which is overweight to fixed rate bonds.

Eurozone troubles, global currency volatility and rising headline inflation were some of the main sentiment drivers during the last quarter of 2011. The yield of the benchmark R208 government bond ranged between 8.3% and 7.8% over this period. Rising inflation and growing concerns about the potentially negative impact of broad-based rand depreciation since August 2011 lend strong support to the inflation-linked bond market. This caused the real yield of the benchmark R197 government inflation-linked bond to rally from 2.61% to 2.25%; the lowest level since July 2008. As a result, the official Inflation-linked Bond Index returned 4.5% for the three months ending December, followed by the All Bond Index (+3.5%) and the SteFi Money Market Index (+1.4%).

The fund purchased medium-dated fixed rate bonds into market weakness and reduced its holding of long-dated fixed rate bonds into market strength, whilst it retained an underweight modified duration tilt and the inflation-linked bond holding. We also increased exposure to credit bonds trading at attractive spreads.

Our investment view remains defensive, with a focus on short-term capital preservation while carefully considering potential investment opportunities into market weakness, while retaining an inflation-linked bond holding as a hedge against inflation risks that are skewed to the upside.