The Fund returned 0.3% for the month. Long bond yields weakened by 0.1 % during the month to 8.10%. The real yields on inflation-linked bonds rallied to 2.75%.

Comparing the yield of 8.1 0% on long bonds, which is a nominal yield, to the real yield on offer from inflation-linked bonds, gives one an indication of the market's inflation expectations as well as the additional yield required from nominal bonds given the risk to inflation expectations.

Relative to inflation-linked bonds, conventional bonds seem to be fairly priced as the derived inflation expectation seems reasonable given the Reserve Bank's inflation target. However, the concern is whether real yields are not a bit on the low side, both on inflation-linked and conventional bonds. Compared to real yields globally, our bonds don't appear to be expensive. Global real yields are, however, at historical lows which poses risks to our local bonds. As a result the Fund has been positioned to be slightly less sensitive to a rise in yields than the All Bond Index.

Both Liberty and ABSA have recently issued debt. We participated in the Liberty issue and invested just more that 1% of the portfolio at a yield of approximately 1% higher than that of the equivalent government bond. We did not participate in the ABSA senior debt issue which was issued at only 0.35% higher yield than the equivalent government bond. In our opinion, the additional yield compensation was not sufficient.

The Fund returned 1.1 % against a return of 1.0% for the All Bond Index.
Long-bond yields strengthened from 8% to 7.9% during July. CPIX inflation, which came in at 3.5% for the year ending June, was well below consensus expectations of 3.8%. Both food and petrol prices, declining on a month-to-month basis, were the major contributors to the low inflation.
Currently, long bonds offer a 4.5% real return. However, consensus expectations are for inflation to rise to above 5% in the first quarter 2006. This would reduce the real yield on offer from long bonds considerably should yields remain at current levels.
The yields of corporate bonds relative to government bonds continued to narrow. This is most apparent in the second tier bank debt. Absa has been a major beneficiary in the last few months, as they have been rerated to a AAA credit rating in the light of Barclays taking a majority stake in the bank. FirstRand's corporate bond has also rerated significantly. The Fund holds bonds from both these banks and has benefited as a result.