For world markets and for Europe in particular, September saw key positive developments: announcement of the ECB's Outright Monetary Transactions (OMT) programme designed to deliver unlimited support to requesting periphery states; the initial report on the Eurozone banking union; the favourable German constitutional court ruling on the European Stability Mechanism (ESM), and the pro-Euro Dutch election result. These developments together with additional QE announced by the US Fed and Bank of Japan have renewed appetites for risk. Safe-haven US 10 year yields have risen to 1.65%, while German 10 year yields also sold off from a low of 1.16%, to end the quarter at 1.44%. On the SA macro front, the past period has been notable for unhelpful news flow. Blows to sentiment came for both GDP and the current account of the balance of payments, based on weak data and expectations that industrial unrest will impact growth in SA production and exports. The current account deficit widened to 6.4% of GDP in Q2 from 4.9% in Q1. SA inflation nudged up to 5.0% in Sept from 4.9% in August. This was due to a 2.1% increase in the petrol price, and surveyed increases in electricity and municipal tariffs. Core inflation remains around the middle of the target range printing 4.6% from 4.5% in August. The month culminated in a one-notch downgrade by Moody's to SA's country rating. Global conditions remain supportive of emerging market bonds generally, and continued capital account support for SA, indicating broadly unchanged fiscal and monetary policy settings. South Africa's country risk premium, the yield spread of South Africa's dollar-denominated bond over US treasuries, was down 2bps to 1.58% at the end of September and down 37bps for the quarter. With the official inclusion of South Africa into the WGBI in October, foreign investors continued to purchase local bonds and were net buyers of R8.3bn for September and R28.2bn for the quarter. Year to date purchases now stand at R76.7bn. The All Bond Index's performance for September was 0.9% and 5.0% for the quarter. For the month the 7-12y year area performed best, delivering 1.6% whilst the 12+ year area was the worst performer, up 0.4%. The benchmark R157 yield was down 9bps for the month from 5.48% to 5.37% and 63bps for the quarter. Year to date, the index has appreciated 13.0%, with the 7-12 year sector the best performer at 15.3%. In the run-up to the ANC leadership congress, our markets remain vulnerable to political and industrial actions and statements which might be negatively perceived abroad. Furthermore, longer-term inflation expectations in both global and SA bond pricing are starting to creep up. The global bond bull market is at an advanced stage, and experience tells us that when a turning point does come, it will be difficult to time. We would view it as imprudent to place Fund capital at risk by making longer-duration bets in an advanced bull market. The Fund thus remains conservatively underweight, mainly in the 12+ year sector. Yield enhancement continues to be mainly via bank and State Owned Enterprise credit exposure in both bond and cash markets. Performance for the Fund was 0.90% in September due to the underweight position in the 12+ year and 7-12 year sector. Return for the year to date is 11.0% which is lower than the benchmark of 13.0% once again due to the underweight position.

Inflation fell below the upper band of the target range in June to 5.7% from 6.1% in May. This was once again due to lower food prices which fell to an annual rate of 6.8% from 9.1%. Core inflation also retraced to 4.4% from 4.5%.

Global leading indicators have weakened recently, as the Eurozone sovereign debt crisis and its implications for global financial markets remains a major risk. Political turmoil in Greece and concerns about the Spanish banking system halted the euro recovery somewhat. The safe havens of US and German 10 year yields remain low. The Japanese economy is now recovering from the negative shock of last year’s earthquake, with reconstruction demand leading to a rebound in output. Emerging bond and equity funds saw inflows as investors increased their risk appetite.

In South Africa the auction of new 11 and 36 year nominal bonds and 13 and 26 year inflation linked bonds attracted interest from both foreign and local investors. This strong demand and a lower than expected inflation print resulted in curve flattening. Concerns of lower growth have continued to surface with the market increasing probabilities of an interest rate cut towards the end of 2012.

The official announcement of the inclusion of SA into the Citigroup WGBI resulted in strong demand by foreigners who purchased R19.3bn of bonds in June, the second largest monthly inflow in history after the R22.9bn in July 2010. Year to date purchases now stand at R48.5bn. The Rand gained 4.3% against the US Dollar and 1.9% on a trade weighted basis in June. South Africa's country risk premium, the yield spread of South Africa's dollar-denominated bond over US treasuries, was down 57bps at 2.07% for the month of June and up 15bps for the quarter.

The All Bond Index performance for June was 3.3%. The 12+ year area performed best, delivering 4.6% whilst the 1-3 year area was the worst performer with 1.4%. The benchmark R157 was down 40bps from 6.4% to 6.0%, whilst the long dated R209 was also down 40bps from 8.9% to 8.5%. Year to date the index has done 7.7% with the 7-12 year sector the best performer at 8.7%.

The outlook for local bonds remains uncertain with continued risk to the upside. Global bonds have become expensive (especially short-dated bonds) and the amount of issuance to fund government deficits remains a concern. The Fund’s short duration position will be maintained given the combination of the global outlook for bonds and domestic issuance pressures. The Fund continues to be underweight mainly in the 12+ year sector. Yield enhancement continues to be mainly via bank and State Owned Enterprise (SOE) exposure in both the bond and cash markets. We continue to hold credit to take advantage of the additional pick-up in yield.

The MPC left the repo rate unchanged in March citing a moderation in inflation which fell to 6.1% from 6.3%. This was due to lower food prices and a stable rand, and reduces the possibility of a rate hike later this year. S&P's downgrade of South Africa's sovereign rating watch to "negative" brought it into line with the other rating agencies. The decision focused attention on the vulnerability of the local bond and currency markets and encouraged a modest sell-off toward the end of the month. The helpful effects of official liquidity injections that sustained world markets in January and February were not evident during March, and economic growth anxieties surfaced once again, negatively affecting global stockmarkets. These anxieties are grounded in still-weak economic fundamentals for developed markets, renewed slowdown anxieties in China, and fears of a disruption to oil supplies. US data releases had better-then-expected employment and consumption figures but household debt and subdued house prices remain concerns. Europe remains the largest drag on global growth and the most significant risk to destabilization. These sentiments encouraged policy makers in all major markets to promise further monetary support. Foreign investors bought R8.4bn of bonds in March, bringing their year-to-date purchases to R21.2bn. The Rand was 2.4% weaker against the US Dollar and 2.2% weaker on a trade weighted basis in March but still gained 5.4% for the year. South Africa's country risk premium, the yield spread of South Africa's dollar-denominated bond over US treasuries, was 8bps wider at 1.97% at the end of March but 19bps narrower for the year. The All Bond Index performance for March was 0.12%.

The 1-3 year area performed best, delivering 0.50% whilst the 12+ year area was the worst performer with -0.37%. Bond yields ended the month weaker. The benchmark R157 was up 9bps from 6.60% to 6.69%, whilst the long dated R209 was up 12bps at 8.83%. Year to date the index has done 2.37% with the 12+ sector the best performer at 2.75%. The outlook for local bonds remains uncertain with continued risk to the upside. Global bonds have cheapened but remain expensive (especially short-dated bonds) and the amount of issuance to Fund government deficits remains a concern. The Fund's short duration position will be maintained given the combination of the global outlook for bonds and domestic issuance pressures. The Fund continues to be underweight mainly in the 12+ year sector. Yield enhancement continues to be mainly via bank and State Owned Enterprise (SOE) exposure in both the bond and cash markets. We continue to hold credit to take advantage of the additional pick-up in yield. Performance for the Fund was 0.18% in March due to the underweight position in the 12+ year sector which performed the worst for the month. Return for the quarter was 1.97% which was lower than the benchmark of 2.36% once again due to the underweight in the 12+ sector which performed the best for the quarter.