Federal Reserve President Ben Bernanke said in June that the Fed would likely slow the pace of its bond purchases later this year. This caused panic in the bond markets with interest rates selling off globally especially in emerging markets. JP Morgan Emerging Market Bond Index returned -5.0% for the month and -6.1% for the quarter with spreads widening 46bps during the 3 month period. US 10 year bond yields sold off by 36 basis points to end the month at 2.49% but did trade at intra month highs of 2.65%. The bearish undertone continued throughout the quarter with US yields rising 64bps. The global bond sell-off also filtered into Europe with German and Italian 10 year yields increasing by 22bps and 39bps to end the month at 1.73% and 4.55% respectively. Yields increased by 44bps in Germany and by 79bps in Italy over the quarter. In South Africa, bond yields sold off following the Fed concerns. This caused foreigners to reduce their emerging market bond exposure and carry trade positions. The Rand was volatile during the month trading between 10.35 and 9.83 before ending the month at 9.87, a 2% appreciation over the US Dollar. During the quarter the currency weakened by 6.9% as the emerging market sell-off persisted. SA inflation ticked down over the quarter from 5.9% to 5.6% (lower than market expectations of 5.8%). Food inflation ticked up from 5.9% to 6.7%, but this was more than offset by the reduction in transportation costs which declined from 7.5% to 3.7%. Core inflation increased to 5.3% from 5.1% whilst PPI eased to 4.9% from 5.7%. 10 year SA bond yields rose to 7.6%, 68bps higher for the quarter. Foreign demand for local bonds slowed with non-residents selling R6.3bn of bonds in June but they still remained buyers of R3.2bn for the quarter. Year to date purchases stand at R17.3bn. South Africa's country risk premium, the yield spread of South Africa's dollar-denominated bond over US treasuries, was up 52bps for the quarter at 2.49%. The All Bond Index returned - -1.52% for June and -2.28% over the quarter. For the month, the 7-12 year area performed the worst, delivering -2.3% whilst the 1-3 year area was the best performer at - 0.1%. The nominal yield curve flattened for the month with short dated yields rising more than longer dated yields. The benchmark R186 yield was up 32bps for the month and 52bps for the quarter to end June at 7.89%. The outlook for local bonds remains uncertain with continued risk to the upside from cost-push inflationary pressures, labour unrest, increasing global sovereign debt burdens and issuance pressure. Low economic growth and currency vulnerability due to the reversal of the carry trade and widening current account deficits are also risk sensitive areas. The Fund's short duration position will be maintained given the combination of the global and local outlook for bonds. The Fund continues to be underweight mainly in the 12+ year sector. This short position is monitored on an on-going basis and will be reduced as yields rise. Yield enhancement continues to be mainly via bank and State Owned Enterprises (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 Fund outperformed the ALBI over the month and quarter given the underweight duration position as yields sold off.