Interest rates for the quarter under review increased between 90 to 100 basis points across the yield curve, resulting in an upward parallel shift of the yield curve. The Repo rate was increased by a further 50 basis points at the August MPC meeting, taking the Repo rate to 8.0%. All the local fundamentals released after the rate hike were worse than market expectations and added to the rand weakness that was seen. This led to the swap and forward rates moving sharply higher. The local banks followed these indicators and increased their funding rates by around a further 40 basis points, thus discounting a further hike in the Repo rate at the next MPC meeting to be held in October.

In anticipation of the further rate hikes the Fund was managed conservatively, by investing a larger percentage of the Fund in the short end of the yield curve and selectively investing in the long end where value was offered. The weighted average duration of the Fund is still being kept relatively short.

During the quarter under review the Repo rate was increased by 50 basis points. This happened after a sell off in emerging markets occurred and the Rand weakened to over seven to the Dollar from just over six in the beginning of the quarter. Inflation fears started to surface, as investors became concerned about the effect of the weaker Rand, the consistently higher oil price and resulting higher expected food prices. The high level of credit extension as well as the weakness of the current account, contributed to the short term yield curve steepening, as investors started to discount further increases in interest rates. Going forward, our view is that interest rates may increase further. Therefore, the Fund will be kept short, reflecting the negative view.

Rates drifted sideways for most of the quarter under review. Towards the end of the quarter sentiment changed to bearish after the release of the private sector credit extension figures. The Rand Dollar exchange rate weakened from around 6.08 to over 6.3 after international investor sentiment towards emerging markets changed following Moody's comments on the large current account deficits of emerging countries. The Governor of the Reserve Bank also changed his stance on interest rates to more hawkish.

In the light of the negative bias in the money market, the duration of the Fund was kept short, reflecting a slightly negative view. Going forward, our view is for a sideways interest rate environment, with a bias towards a slightly steeper yield curve.

Sentiment in the market became more bearish around the middle of the quarter as a result of the Governor of the Reserve Bank's comments that the higher oil price can have on CPIX, as well as PSCE being very high. On the back of this, swap rates increased, which was followed by the one year NCD rate that traded as high as 7.75%. Towards the end of the quarter sentiment improved due to better than expected CPIX figures and the MPC's decision to leave the Repo rate unchanged.

The Rand's continued strength against the USD towards year end led to market talk of further easing in monetary policy in 2006.

The portfolio was managed actively during this period. Duration was pushed to a maximum at the higher levels due to our view that interest rates will move sideways. When rates moved down duration was shortened in order to lock in value.

Going forward the Rand strength and oil price will be monitored closely, as these will be the key determinants of future monetary policy actions.