Trades for the fourth quarter included the sale of shorter dated money market instruments to purchase short dated bonds. The Fund's modified duration position was increased to benefit from higher yielding bonds. The modified duration position in government bonds was increased through the purchase of RSA 2015 R157 paper and the purchase of RSA 2014 R206 and R201 bonds, increasing the exposure in the 3-7 year sector of the yield curve. Short dated corporate bonds were switched for longer dated corporate bonds to benefit from the spread enhancement. Purchases of corporate bonds consisted of Standard Bank, Absa, FirstRand, Nedbank, African Bank, Barloworld, Imperial Holdings, Bidvest, MTN and Toyota Financial Services at attractive spread levels. The exposure to floating rate notes was also increased due to the attractive levels being offered in the market and expectations of interest rates bottoming out. The exposure to securitisation paper was also increased due to the attractive current yield offered in the market.

Looking Ahead
There were a number of bond friendly fundamentals that were able to outweigh the supply concerns during the fourth quarter, namely: positive comments from the Reserve Bank about the inflation outlook given weaker real economic growth and the widening output gap, with most forecasts now indicating that inflation should fall within the 3% to 6% target band in the second quarter of 2010. The continued strength in the Rand will have a beneficial effect on inflation and inflation expectations. The market is pricing for short interest rates to remain on hold for most of 2010. Shorter dated bond yields remained fairly unchanged during the quarter as the market priced for the SARB to leave the repo rate unchanged for the remainder of 2009. The RSA 2015 R157 started the quarter at 8.29%, touched its worst level of 8.70%, before ending the quarter at 8.39%. The 12 month NCD rate traded from 8.08% to a high of 8.25%, before ending the quarter back at 8.08%. Domestic corporate bond spreads have continued to narrow against the government curve as the appetite for risk continues. The SARB forecasts a more normalised environment in 2010 and have subsequently reverted back to bimonthly MPC meetings. The interest rate markets are not pricing any further rate cuts at the moment, but the headline fundamental numbers as well as the level of the Rand will be the key drivers for any further action by the SARB.

Fund review
Trades for the third quarter ending 30 September 2009 included the purchase of shorter dated money market instruments offering a higher yield. The Fund's modified duration position was reduced to shorter than the Index as the interest rate cycle neared its end. The modified duration position in government bonds was reduced through the sale of RSA 2015 R157 paper and purchase of RSA 2014 R206 bonds, cutting the exposure in the 3-7 years sector of the yield curve. Purchases of aorporate bonds aonsisted of Standard Bank, Absa, Firstrand, African Bank, Basil Read, Barloworld and Toyota Financial Services at attractive spread levels. The exposure to floating rate notes was also increased due to the attractive levels being offered in the market and expectations of interest rates bottoming out. There were a number of bond friendly fundamentals that were able to outweigh the supply aoncems during the third quarter, namely: Positive aomments from the Reserve Bank about the inflation outlook given weaker real eaonomic growth and the widening output gap with most forecasts now indicating that inflation should fall into the 3% to 6% target band in the seaond quarter of 201 0 and the 50 basis points cut in the repo rate that was announced during August as a result of the improved inflationary picture. But perhaps of aoncem to some is that the market is pricing in a 70% probability of a 50 basis points hike in twelve month's time. Shorter dated bond yields declined during the early part of the quarter as the repo rate was reduced, but later on yields traded higher as the SARB left the repo rate unchanged in the subsequent meeting. The RSA2010 R153 started the quarter at 7.35%, touched 7.15%, before ending the quarter at 7.50%. The 12 month NCD rate traded from 8.35% to 7.75%, before ending the quarter at 8.10%.

Looking ahead
The SARB forecasts lower headline inflation for the foreseeable future particularly if growth continues to surprise on the downside, increasing the probability of another rate cut in the latter part of the year. The interest rate markets are not pricing any further rate cuts at the moment, but the headline fundamental numbers will be the key driver of any further action by the SARB. Domestic corporate credit spreads, which had by the beginning of the 3rd quarter not really responded to the global tightening trend, finally did start narrowing as risk aversion waned.