The third quarter was positive for the bond market due to the fall inyields in September. The international market was severely affected by thecredit and liquidity crisis, which was sparked by rising losses in the USmortgage market, specifically the sub-prime sector. The extent of theselosses caused panic and a spike in credit spreads across all asset classes,including emerging market spreads. Central banks across the developedmarkets world were forced to add liquidity to the monetary system toprevent a banking crisis. Fears of the effect of a tighter credit market oneconomic growth caused government bond yields in developed markets tofall.

Inflation releases came in consistently above expectations, with CPIXcontinuing to be above the Reserve Bank's 3-6% target due to rising foodprices and broad based inflationary pressure. Despite the deterioratinginflation outlook, the fall in global yields enabled bond yields to tick down inthe local market. This enabled the ALBI to outperform cash by 112 basispoints over the quarter.

With yields falling across the curve, the long end delivered the highest return due to its duration. The 12+year area achieved the highest return of 4,42%, outperforming the overall ALBI's return of 3,35%.

The rand had a stable quarter as the dollar weakened significantly due to fears of a slowing US economy. The rand strengthened by 2,45% against the dollar, and weakened by 2,85% against the euro, at R6.87/USD and R9.80/Euro respectively.

South Africa's country risk premium moved wider due to global credit concerns. With emerging market credit spreads widening, SA's country risk premium moved up at the beginning of the quarter to 1,5%, before recovering to end the quarter at 1,3%.

US bond yields fell dramatically over the quarter as the market moved from pricing in rate hikes to pricing in aggressive rate cuts due to the deterioration of the credit markets. The FED delivered a 50 basis points rate cut at the September meeting. The US nominal 10-year yield fell 55basis points to end at 4,54%. UK and Euro area bonds also moved to pricein a more benign interest rate scenario, falling 43 and 23 basis points respectively to end at 5,01% and 4,33% respectively.

The effective duration of the portfolio was maintained at around 1,5 years below the ALBI as bond yields remain at levels where they offer littlevalue. Overall, the portfolio is positioned to generate outperformance in ascenario of rising interest rates. We have looked to enhance yield in thefund through some high quality credit exposure, and we have maintainedswap exposure in the short and medium areas of the yield curve.

Bonds had a poor second quarter as inflationary pressure and rising international yields caused an appreciable rise in local yields across the curve. However, given the continued low level of real yields and the outlook for inflation going forward, we still see significant upside risks to yields. We will thus maintain our short position until we see value in the bond market.

Yields rose by around 70 basis points across the curve, with short bonds rising slightly more due to the market pricing in further hikes in the short repo rate. International bonds in developed markets sold off heavily over the quarter, with 10-year yields in the US, UK and Euro area rising by around 50 basis points.

CPI and PPI data releases were consistently worse than expectations, as broad-based inflationary pressure forced CPIX above the Reserve Bank's 3-6% target for the first time since 2003. This deterioration in inflation weighed heavily on bonds and the ALBI underperformed cash by 3,76% for the quarter.

The current duration of the fund is 3,57 excluding inflation-linked bonds and 4,44 including inflation-linked bonds, versus the ALBI duration of 5.06. The fund currently has an option structure whereby the duration is flexible with respect to the level of interest rates. With the option, if rates go up, the duration of the fund decreases by 0,05, while if rates fall the duration increases by 0,28. This means that the portfolio duration is variable with respect to the level of rates, but overall remains short relative to the ALBI.

The effective duration of the portfolio is around 1,5 years below the ALBI as bond yields remain at levels where they offer little value. Overall, the portfolio is positioned to generate outperformance in a scenario of rising interest rates. We have looked to enhance yield in the fund through some credit exposure, and we have maintained swap exposure in the short and medium areas of the yield curve.

Herman Steyn & Guys Toms
Prescient Investment Management

April was a positive month for bonds as yields fell across the curve, with the long end unwinding some of last month's normalisation. The 10-year area fell by 16 basis points, while the 20-year bonds were 19 basis points lower. International bonds had a mixed quarter as the Australian 10-year bond fell 5 basis points, while 10-year bonds in UK and Euro area rose by 12 and 13 basis points respectively. The 10-year US bond rose 4 basis points.

Although producer prices were worse than expected, bond yields rallied on a stronger rand, as well as the re-weighting of All Bond Index (ALBI) and subsequent lengthening of the duration of the ALBI on 3 May 2007. The ALBI outperformed cash by 80 basis points for the month.

-With yields falling across the curve, the 12+ year sector achieved the highest return with 2.29%, relative to the ALBI return of 1.53%.
-With the dollar falling from $/€1.33 to $/€1.36and strong commodity prices, the rand strengthened against the dollar, while remaining flat to the euro. The rand was up 3.5% against the dollar to end the month at R/$7.02 and R/€9.64.
-US treasuries were generally range bound, reflecting the uncertainty regarding the US economy and inflationary pressures. The US 10-year ticked up to 4 basis points to 4.66% by month end. Inflationary pressures persist in UK and Europe, with 10-year bond yields 12 and 13 basis points higher at 5.07% and 4.17% respectively.

The current duration of the fund is 3.87, excluding inflation-linked bonds, and 4.59 including inflation-linked bonds, versus the ALBI duration of 5.16. The fund currently has an option structure where the duration is flexible with respect to the level of interest rates. With the option, if rates go up, the duration of the fund decreases by 0.16, while if rates fall, the duration increases by 0.16. This means that the portfolio duration is variable with respect to the level of rates, but overall remains short, relative to the ALBI. The portfolio is positioned to generate out-performance in a scenario of rising interest rates, as bond yields are at levels where they offer little value in the current inflation environment.
Due to bond-swap spreads being attractively priced, we have maintained our swap positions in the R196 and R153 areas of the yield curve.

Herman Steyn & Guy Toms
Prescient Investment Management