There were two significant events in the money markets last month for South African investors. The first was the MPC's announcement of a hike in the repo rate by 25bps and the second was Fed Chair Powell's announcement that interest rates are now "just below" the "broad range" of estimates of neutral. US yields eased some 10 bps during the month. In the case of South Africa, with US 10 year bond yields at 3%, investors require an excess yield of 3% for SA sovereign risk (largely unchanged form a month ago) and an additional excess yield of 2.9% for rand currency risk over a ten-year term. With a 2.9% currency risk premium and assuming purchasing power parity holds in the long term, US inflation expectations of 2% to 2.5% imply a domestic inflation rate in the order of 4.9% to 5.4% - probably towards the low of what can reasonably be expected. What was of interest is that post the Fed comment we have not seen a narrowing in EM sovereign risk premia. EM risk remains elevated as the Fed is still likely to raise rates even though at a slower pace. Also, we have seen high yield credit in both the US and Europe sell off over the last month as risk perceptions rose there. The All Bond Index (ALBI) gained +3.87% for the month. The yield curve shifted down by approximately 40bps across the curve.

The Fund was slightly underweight duration compared to the ALBI. Holdings consisted of credit exposure through banks and State Owned Corporations, in both the bond and cash markets, to take advantage of the additional pick-up in yield. Contributors to performance: Credit exposure and the resulting yield pick-up contributed positively to performance. Detractors from performance: The Fund’s slightly short duration position had a negative impact on performance.