Fund Review
The Fund received inflows of R1.85 billion during the second quarter of 2012 as returns were better than those of money market portfolios. The modified duration was kept low at 0.57 years, but the fund holds assets yielding much higher than cash. The inflows were used to purchase higher yielding assets, with a preference for floating rate instruments, where the exposure was slightly increased. The Fund's strategy remained defensive, given that interest rates are considered to have bottomed out. The second quarter of 2012 saw bond yields disconnect with the Rand and trade lower, with the short end of the yield curve touching all-time lows. The BEASSA ALBI benchmark returned 3.3% for the quarter. The 12 month NCD opening the quarter at 6.23% and closing the quarter at 5.90%. Meanwhile, the Rand weakened during the quarter to a three year low of R8.70 as volatility in the market briefly returned before the risk on trade resumed again. The increased demand for South African debt was mainly driven by a record demand by foreign investors who increased the year to date holding of South African debt to R48 billion with R18 billion coming in the last months of the quarter alone. The foreign demand was mainly on the back of South Africa's inclusion in the World Government Bond Index (WGBI). It was also a quarter where headline inflation declined to inside the target range, prompting the market to start discounting a 60% probability of a rate cut in the next meeting. Internationally there was higher demand for US and German government debt as the problems in Europe mounted. The SARB MPC left the domestic repo rate unchanged, but issued a more dovish statement in comparison to past statements. This helped to keep the short end of the yield curve well bid. The yield curve started the quarter at 170 basis points and ended the quarter steeper at 192 basis points on the yield differential between the R186 and R157. On the supply side, the government continue to issue longer dated instruments, while also indicating an increased activity in performing switch auctions, where they buyback shorter dated instruments and issue longer dates ones.

Looking Ahead
The next quarter, the market is likely to still be affected by the events in the Euro zone which may have implications for volatility. With Greece out of the radar for a little while, markets may continue to benefit from increased confidence. Domestically, the central bank is expected to leave rates unchanged, although the balance of probabilities favour another cut, given declining inflation and slowing growth. Monetary policy will continue to be accommodative for a considerable length of time.

Fund Review
The fund received inflows of R1.09 billion during the first quarter of 2012 as returns were better than those of money market portfolios. The modified duration was kept low at 0.65 years, but the fund holds assets yielding much more than cash. The inflows were used to purchase higher yielding assets, with a preference for Jibar linked instruments. The fund's strategy remained defensive as a result, given that interest rates are considered to have bottomed out. The floating rate notes purchases included ABSA, Standard Bank, and FirstRand papers and some securitization paper.

Looking Ahead
The bond market traded in a tight range during the first quarter of 2012 as the market struggled to pick up any serious directional trend. Demand for riskier assets by international players was fairly effectively offset by Government commitments to domestic supply. The international bond market environment improved significantly during the course of the first quarter resulting in an increased demand for risky assets. Emerging markets, including South Africa, benefited from this "risk-on" trade and this put an effective cap on yields on the upside. The Volatility Index improved to 15.5%, a level last seen before the credit crisis. Major central banks around the world continued to implement accommodative monetary policy in order to prevent their economies from slipping back into the recessions that followed the sovereign bond crisis in Europe. In the domestic market the SARB kept in step with its international peers by remaining accommodative in setting monetary policy. In the budget speech in February, the government brought down its projected budget deficit to levels that were below market consensus. This announcement, which was broadly positive for the bond market, was accompanied by government's commitment to switching shorter dated bonds into longer dated bonds and introducing ultra-long-dated new issues. It also indicated that it will continue to issue approximately R3.1 billion of long-term bonds in the domestic market per week. The combined effect of these announcements was to keep the yield curve normalized. Inflation linked yields traded lower as demand for inflation protection increased.

Going forward, the market is expected to continue trading sideways with risk in the eurozone still expected to impact sentiment. The SARB is expected to leave rates unchanged for the whole year as long as inflation does not move significantly higher. Shorter dated bonds will remain anchored by an accommodative monetary policy; however, longer dated rates will remain elevated due to supply.

The fund changed its benchmark from BEASSA All Bond 1 to 3 year split index to STeFI Composite Index effective from 1 March 2012

Fund Review
Fourth quarter investment flows into the Fund increased by R1.6bn as the short end of the yield curve continued to look attractive against money market yields. Shorter dated money market instruments were liquidated and reinvested in longer dated high yielding floating rate instruments. The modified duration position of the Fund was maintained at 0.7 years, which is short of the benchmark as interest rates are expected to have bottomed out with the next move expected to be up. The Fund's exposure to securitized assets has been increased, mainly in the residential mortgage issues, due to attractive levels being offered by issuers in relation to money market assets.

Looking Ahead
The fourth quarter of 2011 was characterized by further volatility in bond yields driven by a plethora of factors both fundamental and technical. Five year benchmark yields ended the quarter and year on a positive note. There was a general improvement in the demand for risky assets as volatility - measured by the VIX - reduced substantially from a high of 45% to end the quarter at 23%. As a result the JP Morgan South Africa sovereign spread compressed by 50 basis points as the risk-on trade dominated the quarter although there was some volatility in between. The Rand remained on the back foot and at one stage touched a high of R8.61 before recovering to end the quarter at R8.07 as concerns around the sovereign debt crisis in Europe lingered. The ECB which had been hawkish on inflation changed tune and cut the minimum bid rate by a total of 0.5% during the quarter to end at 1% and took further steps to reduce the potential liquidity gridlock by reducing reserve requirements amongst other measures. The short end yield curve remained steep with the yield differential between the 12 Month NCD and RSA 2015 R157 trading at 70 basis points. The steepness is as a result of increasing inflation, expected funding pressure from government due to tepid economic growth and accommodative monetary policy by the SARB. The latest inflation data showed CPI breaching the top end of the SARB target, printing 6.1%, and is still expected to rise further due to a weaker Rand and higher food prices. Inflation linked bonds benefited from inflation rising as real yields trended lower.
The SARB monetary policy committee left rates unchanged in the two meetings held, as they were concerned about below average growth and increasing inflation. The SARB will continue to find a balance between growth and inflation, and as a result, the repo is expected to remain flat for most of 2012 unless second round inflation starts to increase as well