In conditions reminiscent of the market turbulence of 1998, 2001 and 2008, both nominal and real bond yields rose sharply over the past quarter. In response to the ill-considered and blatantly political decision to remove Mr Nene as Minister of Finance, the yield of the benchmark R186 bond spiked by half a percent in one day to 10.40%, the worst level since 2008. Although the replacement of the incumbent Mr van Rooyen by the well-respected Mr Gordhan brought some relief, the R186 still closed the fourth quarter 131 basis points (bps) higher at 9.76%.

The appropriate market reaction to the unthinkable attempt by an ANC faction to cross a crucial line, with dire consequences for fiscal credibility, is illustrated by the dismal performance of the JSE ASSA All Bond Index (ALBI). The ALBI December return of -6.7% sealed the fate of the bond market for the fourth quarter and the year, with returns of -6.4% and -3.9%, respectively. Although more resilient than nominal bonds, the inflation-linked bond market did not completely escape the carnage. The JSE ASSA Inflation-linked Government Bond Index (IGOV) returned -1.9% for the month, 1.0% over the quarter and 3.6% during the year. As would be expected, the money market offered a shelter against market volatility as the STeFI Composite rendered 1.6% for the quarter and 6.5% for the year.

The debacle surrounding the dubious Cabinet change overshadowed many other important events. In a refreshing show of independence and policy credibility, the South African Reserve Bank (SARB) raised the repo rate for a fourth time in the current cycle. The repo rate is now at 9.75% or 1.25% higher from the recent low. Elsewhere, the US Federal Reserve Board finally acted by also increasing its policy rate by 25bps at the last Federal Open Market Committee meeting of the year. The direct impact on bond markets was short-lived and fairly limited as the US policy change, in particular, had been telegraphed well in advance.

From an economic data perspective, recent trends generally were not favourable for the bond market. Locally, the external trade position weakened, pressure appears to be building on the budget deficit, while the severity of the countrywide drought further heightened concerns about higher future food prices. On the positive side, the sharp crude oil price decrease in response to the persistent global supply glut managed to offset the sharp depreciation of the rand. Together with a weak consumer backdrop, it acted as a buffer against a sharper acceleration in the rate of inflation until now.

The fund performed poorly relative to its benchmark for the one-year period ending 31 December 2015. This was largely the result of the overweight position in bonds with a maturity of greater than 12 years. Some of this poor performance was offset by the underweight position in shorter-dated bonds, which also weakened. In addition, state owned enterprise spreads stabilised this year, meaning that there was no performance detraction from spread accrual in the fund.

The fund generally maintained a neutral interest rate risk positioning during the quarter. However, there is a significant yield curve position, with a large overweight position to bonds with a maturity of greater than 15 years, which is offset by an underweight position to bonds with a maturity of less than 12 years.