Bonds reversed their gains from the previous month, with 10-year bonds closing the month yielding 8.35%, up from 7.89% at the end of August.

Risk aversion came to the fore globally with the local market not spared as foreigners sold local bonds and the rand plummeted to close the month at R8.09 to the US Dollar. The MPC elected to keep the repo rate at 5.5%, but highlighted a willingness to cut rates if global economic conditions deteriorated significantly.

With the sharp sell off in yields, the fund's short duration was reversed, with the fund now having a neutral duration position versus the All Bond Index.

Local credit issuance in September reflected weaker demand and slightly wider pricing as market participants presumably eyed the sell-off of global credit. Secondary market credit still continues to tighten somewhat, but the momentum would now appear to be faltering.

After two very strong months bond yields retraced somewhat during June with long bonds ending the month yielding 8.39%. On the data front CPI for May surprised on the upside at 4.6% year-on-year with food prices largely to blame for the surprise. June was one of the busier credit issuance months we have seen this year. Two corporates, Barloworld (A+) and Sappi Southern Africa (A) successfully raised funding via oversubscribed issues. Barloworld raised just over Rl billion via the issue of a both 5 year and 7 year bonds. Pricing was 0.5% tighter than 9 months ago reflective of the demand for credit in the local market.

Sappi, which had not been in the market for 2 years, raised R500 million via the issue of a 5 year bond at a spread of 1.8% over the curve. The fund participated in both these issues. On the banking side, Standard Bank raised R3 billion via the issuance of a number of different instruments. The fund did not participate in this issue as it already had sufficient exposure to Standard Bank. The local securitisation market continued to be well supported with Investec successfully refinancing a residential mortgage securitisation during the month.

The fund maintains its neutral interest rate exposure versus the All Bond Index and continues to remain overweight credit.

After the weakness experienced in the local bond market over recent months, March saw some consolidation with long bonds closing the month relatively unchanged yielding 8.76%. The SARB Monetary Policy Committee (MPC) met during the month and again raised their inflation forecast with the 2012 average now expected to be 5.7%, primarily due to a higher forecast oil price. They also revised upwards their growth forecast for 2012 from 3.6% to 3.9%. Despite these upward revisions the MPC continued to focus on downside risks to growth whilst highlighting they would closely monitor any second round effects emanating from the risks of higher food and administered prices. As expected they left rates unchanged.

On the credit side, both the Ekurhuleni Metropolitan Municipality and the City of Johannesburg issued new 10 year bonds during the month. Ekurhuleni (AA rated) issued R800m of the EMM02 at a spread of 1.85% above the equivalent government bond. The fund participated in this issue adding to its existing Ekurhuleni exposure which it acquired at a similar level last year, and did not participate in the city of Johannesburg issue.

In very thin trading in December the local bond market saw some recovery following the sharp 0.5% rise in yields in November. 10 year bonds closed the year at 8.14% from 8.31% a month earlier. The recovery was accompanied by a stronger Rand, gaining 4% against the Euro and 7.2% against both the US Dollar and British Pound. Rand strength has a beneficial effect on imported inflation.

This improvement in bond prices is noteworthy for two reasons. Firstly, it came against a backdrop of significantly weaker US Treasuries. The yield on US 10-year notes closed the month 50 basis points higher. In turn, this has lead to a compression in the yield spread between 10 year SA and US bonds to 4.9%. This puts this differential at its lowest level since April and certainly well below the average of 5.4% observed since the collapse of Lehmans in September 2008. At the margin, it may make South Africa bonds a little less attractive to yield hungry foreigners, who, interestingly were net sellers of local bonds in November and December. Secondly, November's year-on-year inflation rate came out at 3.6%, being 0.2% higher than the October level and 0.4% above that of September.

The fund continued to hold its short duration position of 0.25 years and maintains its credit overweight. Yields on corporate bonds remain modestly above fair value in our models and with credit risk receding globally in line with the economic recovery, further performance from this asset is anticipated. Market activity in listed credit was subdued, as expected. Issuance should pick up as we head through January and the fund will add to its existing exposures where we find pricing still attractive.