The SARB elected to hike the repo rate (the rate at which the central bank lends funds to commercial banks) by 100 basis points to 13.5% during September. The accumulated tightening during 2002 now stands at 400 basis points. As a result of tighter monetary policy money market interest rates continued to trend higher through the course of September with the 3-month NCD rising by 55 basis points to close the month at 13.1%. The 12-month NCD rose to 14.05% from 13.55% at the end of August.

Analysts are divided over whether the SARB will continue to tighten its monetary stance. It appears though that banks are able to raise sufficient funding at current rates and this in turn implies that institutional investors are generally of the opinion that interest rates are high enough to ensure a declining trend in inflation through the course of 2003. SIM is also of the view that official interest rates will remain unchanged during the remainder of 2002 and our analysis suggests that the 3-month NCD should stabilize around the 13.4% level.

Apart from the level of the money market curve, we'll also closely monitor changes in the shape of the curve. Our expectation is that the curve should flatten which would imply that institutional investors are beginning to increase the duration of their money market portfolios. SIM has already started to invest in the longer end of the money market, but has room to increase the market risk further, should the interest rate outlook become clearer.

The short end of the domestic money market continued to drift higher during 02Q2 in anticipation of further monetary tightening by the central bank. In the event the three-month NCD rate rose from 11.2% to 12.25% during the quarter. However, the one year area of the curve remained steady around 13%. It would appear therefore that the money market correctly anticipated the one per cent hike in the repo rate that was announced during June 2002. Judging from the reaction of the money market to the rate hike, investors are not currently expecting further tightening by the SARB.

With the money market curve stabilizing SIM began to invest more aggressively in the longer end of the curve. The fixed income team started to bring the risk of having to reinvest maturing assets at lower rates (i.e. reinvestment risk) more explicitly into its calculations towards the end of the quarter. In order to hedge against reinvestment risk, which will probably become the predominant risk in the money market during 02H2, the duration of all the money market portfolios was increased during the quarter.

SIM expects that the rate on the three-month NCD would stabilize just above 12.0% during the latter half of 2002. Judging from the fact that the money market derivatives are mostly trading underneath the spot market, but also taking into consideration SIM's more upbeat inflation outlook for 2002H2, the fixed income team expects that the money market curve will continue to flatten during 02Q3. The team will therefore continue to invest mostly in the long end of the market, while keeping the durations of the portfolios close to the maximum allowed by the different mandates.

The money market re-priced upwards during March, with the 3-month NCD rate rising from 10.5% to 11.2%. The 12-month NCD rate rose to 13.0% during the month implying that the yield curve steepened quite dramatically. Also, it would seem that the money market has factored in at least one further 100 basis point rate hike by the central bank.

The fund manager expects money market rates to stabilise during April, while the money market curve is expected to flatten during the course of 2002. He therefore believes that the money market is offering good value for investors, with the longer end of the curve looking particularly attractive. The fund therefore not only offers investors a "safe haven" for cash during times of market uncertainty, but are also suitable for conservative investors dependent on a fixed income.

In accordance with the statutory stipulations with which money market funds must comply, the portfolio may comprise 100% government and public securities, or a combination of government and public securities and bank deposits. A maximum of 30% of the fund may be invested in the top four commercial banks, 20% in medium-sized banks, and 5% in smaller banks.