The JSE All Bond Index (ALBI) managed to produce a positive return of 2.2% for the quarter ending 30 September 2014, due to decent valuations and a less-negative theme compared with the beginning of the year. We have experience rand weakness in the past month - although that is more a positive US dollar story as opposed to a negative rand story, it caused domestic bond yields to retrace somewhat - leading to negative returns for September. The generic 10-year bond traded to a high of 8.386% and a low of 7.81%, while ending the quarter at 8.22%. Inflation-linked bonds were the fixed income asset class of choice, returning 11.8% for the year to the end of September 2014, but they underperformed nominal bonds for the quarter with a return of 1.0%.

The Fund added significant modified duration during the past quarter, due to the significant change in the ALBI modified duration as well as additional active trading. We continued to increase our exposure to long-dated bonds (15+ years) and reduced our exposure to short-dated bonds due to the steepness of the curve and our view that the 15+ year bonds are trading at reasonable real yields of close to 3.0%. So, while valuations at the long end of the nominal bond curve look attractive, the theme for bonds is not as compelling and one has to proceed with caution. The theme spotlight is again squarely on Government's fiscal position, with the negative news flow from state owned enterprises and the possible adverse impact that could have on the fiscal balance. The market will pay particular attention to the medium-term budget policy statement to be released during October to get clarity on this matter. Another upcoming event risk in October is the announcement of the new governor of the South African Reserve Bank (SARB), as Gill Marcus indicated she will not do a second term. To ensure market stability, we hope the new governor comes from within the ranks of SARB as that will likely mean a continuation of current policy.

During the past quarter, we had a significant credit event in the domestic corporate bond market when African Bank was placed under curatorship on 10 August 2014. This caused market participants to review their pricing of credit and we saw credit spreads widen for various issuers - in both the primary issuance market as well as the secondary trading market. We expect the pressure on credit spreads to remain in the market in the short term. In general, demand for credit assets remains strong and, as always, we are selective in terms of issuer and industry selection.

The fund positioning is in line with our investment view.

The All Bond Index (ALBI) managed to produce a decent positive return of 2.5% for the quarter ended 30 June 2014, as increased liquidity in global markets again brought the relative attractiveness of emerging market local currency bonds to the fore - despite a one notch ratings downgrade by Standard & Poor's and a negative ratings outlook by Fitch. It is clear from the lack of market reaction to this data that the bad news was mostly priced. The rand traded within a range, albeit fairly wide. Bond yields, as evidenced by the 10-year bond, also traded within a range, with a high of 8.39% and a low of 7.89%.

The fund reduced its underweight modified duration position during the past quarter, with some active trading. We continued to increase our exposure to long-dated bonds (15+ years) and reduced our exposure to short-dated bonds. The main themes affecting the local bond market remain negative and the biggest issue in our mind is our twin deficit, which reduces our attractiveness relative to other emerging market peers.

In particular, we remain concerned about the outlook for fiscal policy in the light of the lower growth outlook and its negative impact on government revenues. In the short term, the current account will remain under pressure (despite the recent significant improvement), in part as a result of the platinum strike and its impact on exports for the first half of the year, but in general our terms of trade continue to weigh negatively.

The bond yield curve is still steep by historical standards and continued to steepen further during the quarter, as measured by the yield difference between the R2048 bond and the R157 bond. This is a clear signal that investors in long-dated bonds are more price sensitive. The Barclays/ABSA Government Inflation-linked Bonds Index returned 5.9% for the quarter, ensuring that it continues to outperform the ALBI in the short term. Demand for credit spreads remains strong, but, we remain selective in terms of issuer and industry when buying credit risky assets, as credit spreads appear low compared to history and considering the very low gross domestic product (GDP) growth outlook for the local market.

The fund's positioning is in line with our investment view.

The All Bond Index (ALBI) managed to produce a positive return of 0.9% for the quarter ending 31 March 2014, despite the very negative returns (-3.24%) for the month of January. The rand remained on the back foot during the quarter as sentiment towards emerging markets turned negative, and many emerging market central banks hiked policy rates in an effort to minimise portfolio outflows. The South African Reserve Bank Monetary Policy Committee increased the repo rate by 50 basis points in January, a move that caused the money market rates as well as the short end of the bond yield curve to increase significantly.

The fund increased its underweight modified duration position during the past quarter, despite some active trading. We increased our exposure to long-dated bonds and reduced our exposure to short-dated bonds. The key domestic drivers of our negative view on bonds have not materially changed from last year. These are the sticky inflation problem; the wide current account deficit and wide fiscal deficit; worsening terms of trade; the volatile labour situation, in particular the mining sector strikes; and a very volatile free-floating exchange rate. In addition, the normalisation of global real rates also continues to impact the domestic market negatively.

While the bond yield curve is still steep by historical standards, we have seen significant flattening during the past quarter, primarily driven by the move higher of short-dated bond yields. The Barclays/ABSA Government Inflation-Linked Bonds Index (BILBI) returned 1.7% for the quarter, ensuring that it continues to outperform the ALBI in the short term. Demand for credit spreads remains strong. However, we remain selective in terms of issuer and industry when buying credit risky assets as credit spreads appear low compared to historical norms and considering the very low GDP growth outlook for the local market.

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