At the latest Monetary Policy Committee (MPC) meeting, the South African Reserve Bank (SARB) cut the repo rate by 50 basis points (bps) to 6%. Governor Marcus cited lower domestic inflation, the continued appreciation of the rand versus the major global currencies and relatively weak domestic demand conditions, as being the key reasons for the SARB decision. The SARB's view is that the improved inflation outlook had created sufficient room for additional monetary policy stimulus tothe fragile economy. They do, however, temper their view by reiterating that scope for further downward movement is limited, but will be assessed on an ongoing basis.

Headline inflation numbers fell from 3.7% in July to 3.5% in August. This was counter-balanced by an up-tick in PPI, which rose from 7.7% year-on-year in July to 7.8% year-on-year in August.

The rand has shown remarkable resilience despite the interest rate cut, strengthening significantly for the month of September from R7.32 to R6.92 to the US dollar. The third quarter has seen the rand appreciate more than 9% against the greenback. This was on the back of offshore demand for South African bonds and equities and a weakening dollar. With upside risks still in place with regard to the inflation target (administered prices and in particular further electricity hikes), the Forward Rate Agreements are not pricing in any additional rate cuts. The market is pricing in flat rates going forward with rates ticking up in about 18-months' time. Hence, we continue to keep the duration of the portfolio low as there is not much yield pick-up opportunities at the longer end. Credit exposure has been increased, but remains conservative in selected issues where higher yield could be locked-in.

The three-month JIBAR fell 59 bps over the quarter from 6.62% to 6.03% as the repo rate was dropped over the quarter. Currently, the market is pricing in flat rates going forward, with a moderate up-tick in about 12-18 months' time.

International bond yields have rallied during the quarter and continue to reflect the concerns the equity market has with the future growth outlook. This uncertainty has translated into volatile currency markets. Emerging markets have enjoyed inflows as global investors have switched to high-yielding currencies.

Local bond yields were stronger across the yield curve for the quarter ended September. The benchmark R157 was 73 bps lower at 7.30%, while the long-dated R209 was 103 bps lower at 7.96%. The ALBI performance for the quarter ended September was 8.04%. The 12+ year area was the best performing sector for the quarter delivering 11.93% and the 1-3 year area was the worst performer with 2.32%. The ALBI outperformed cash by 7.50%.

Demand for local bonds continues to be driven by foreign buyers with net buying of around R74 billion for the year-to-date. Foreigners were net buyers of R4.9 billion bonds in September, after having bought R12.8 billion in August and R19 billion in July.

The current duration of the portfolio has been brought closer in line with that of the ALBI duration. Credit spreads have continued to compress over the last couple of months on the back of increased demand and an improved outlook. We are being very selective at current levels.

Although bonds are showing value with implied inflation now at levels around 5.3%, the weak fiscal position has not changed and funding pressures are expected to remain, which could result in further upward pressure in bond yields. The recent foreign buying has resulted in yields falling. however, this trend needs to continue to support bond yields at these levels.

We have are being very selective about adding credit exposure at the current credit spreads and have swapped out our inflation-linked exposure as we see the risks being that inflation prints lower over the coming months, which would erode the benefits of the positive inflation carry.

Although we are seeing value in bonds, the increased supply of RSA bonds does pose an upside risk to yields and would be a concern for any sustainable rally in bond yields.

The Monetary Policy Committee of the South African Reserve Bank has signalled that interest rates are probably at appropriate levels taking into account the current inflation and growth forecasts. Headline inflation reduced further in May, falling from 4.8% in April to 4.6% in May.

However, upside risks to the inflation target remain, the main factors being electricity tariff hikes and wage demands, both being higher than the current inflation rate. Producer Price Inflation (PPI), rose for the sixth consecutive month in May, by +6.8%. The last six months has seen a steady up-tick in PPI, the latest having seen a breach of the 3-6% headline inflation target range. Private Sector Credit Extension increased by +0.8% in May, which beat economist's forecasts. The fall in interest rates has taken time to filter through the system, but we now see a cautious up-tick in household credit; growth in the broadly defined M3 measure of money supply also ticked up in May, rising +1.4% on an annualised year-on-year basis. Caution, in both the residential and commercial space, is also being exercised in the mortgage advances area.

Given where we are in the interest rate cycle, we continue to keep the duration of the portfolio low. Credit exposure has been increased, but remains conservative in selected issues where higher yield could be locked-in.

The three-month JIBAR remained virtually flat in response to the latest inflation numbers, ticking up 2 basis points (bps) after the release of the latest data. Currently, the market is pricing in flat rates going forward for approximately the next 12 months, with the possibility of a modest up-tick in rates in subsequent months.

International bond yields benefited from the risk aversion arising as a result of the sovereign concerns in the euro region and the concerns surrounding the impact on future growth prospects as countries address their deficit concerns. Local bond yields were weaker across the yield curve for the quarter ended June. The longer end of the curve outperformed the shorter end over the quarter, due to higher yield pick up in the longer end. The benchmark R157 was 8 bps higher at 8.03%, while the long-dated R209 was 16 bps higher at 8.99%. The ALBI performance for the quarter ended June was 1.12%. The 3-7 year area was the best performing sector for the quarter delivering 1.94% and the 12+ year area was the worst performer with 0.54%. The ALBI underperformed cash by 0.61%.

Latest Inflation data for May was in line with what the market was expecting with 4.6% recorded for May. Demand for local bonds continues to be driven by foreign buyers with net buying of around R37.5 billion for the year-to-date. There was a further R7.5 billion of net foreign purchases of bonds in June.

During the quarter, the rand ended the quarter mixed, ending down 5.22% against the US dollar and 0.76% weaker on a trade-weighted basis. South Africa's country risk premium, the yield spread of South Africa's dollar-denominated bonds over US treasuries, widened by 52 bps to 2.02% for the quarter. Global bond yields ended the quarter substantially firmer. The US 10-year yield was 87 bps firmer at 2.96%, euro area bonds yields fell 53 bps to 2.55%, and UK bonds fell 58 bps to 3.35%.

The current duration of the portfolio has been brought closer in line with that of the ALBI duration. Credit spreads has been compressing over the last couple of months on the back of increased demand and an improved outlook. We are being very selective at current levels.

Although bonds are showing value with implied inflation now at levels around 5.6%, the weak fiscal position has not changed and funding pressures are expected to remain, which could result in further upward pressure in bond yields.

We are being very selective about adding credit exposure at the current credit spreads. We have swapped out our inflation-linked exposure as we see the risks being that inflation prints lower over the coming months, which would erode the benefits of the positive inflation carry. Although we are seeing value in bonds, the increased supply of RSA bonds does pose an upside risk to yields and would be a concern for any sustainable rally in bond yields.

The Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) surprised the market at their March meeting, unanimously deciding to reduce the repo rate by 50 basis points (bps) from 7% to 6.5%. The Governor of the SARB, Gill Marcus, stated that the main reason for the change in opinion of the MPC was to "reinforce the sustainability of the economic upswing without jeopardising the achievement of the inflation target". She then intimated that the door has not been entirely closed on the possibility of another rate cut if the economic indicators remained stable and inflation remained benign. However, economists are of the collective opinion that the possibility of another rate cut remains remote.

Headline inflation fell into the target range in February, ticking down from 6.2% in January to 5.7% in February. The price of Brent Crude rose by 5.2% during the month, moving from $76.68 to $81.20, after climbing +7% in January. The rand displayed strength during the month versus all the major international currencies. The local currency appreciated 5.2% versus the US dollar, 6.2% versus sterling and 5.8% versus the euro.

PPI rose for the third successive month; in February it increased by +3.5%, after decreasing on a y-o-y basis for the preceding seven months before the December 2009 increase. Private sector credit extension decreased by -0.57% in February from a revised drop of -0.70% for the month of January and growth in the broadly defined M3 measure of Money Supply increased 0.14% in February on an annualised y-o-y basis as opposed to 0.59% in January.

Currently, the Forward Rate Agreements (FRA Curve) are pricing in flat rates going forward, with approximately 50 bps hike expected in 12-15 month's time. Given where we are in the interest rate cycle, we are not seeing much value in the longer end of the curve and will continue to remain short at these levels. Credit exposure has been increased, but remains conservative in selected issues where higher yield could be locked-in.

The 3-month JIBAR reacted positively to the reduction in the repo rate, firming 51 points after the announcement towards the end of March. Currently, the market is pricing in flat rates going forward for approximately the next 12 months, with a modest up-tick in rates in about 15 months time.

The longer end of the curve outperformed the shorter end over the quarter, due to higher yield pick-up in the longer end.

Global bond yields ended mixed to slightly firmer after a fairly volatile quarter. Euro bonds recouped some of their earlier losses after the release of the European Union aid package to Greece. However, supply continues to remain a big concern.

Local bond yields were 20 to 40 bps firmer across the yield curve for the quarter ended March with the exception of R209. The benchmark R157 was 44 bps lower at 7.945% while the long dated R209 was 7 bps higher at 8.825%. The ALBI performance for the quarter ended March was 4.45%. The 7 - 12 year area was the best performing sector for the quarter delivering 5.63% and the 1 - 3 year area was the worst performer with 2.58%. The ALBI outperformed cash by 3.47%.

Although the February inflation data came out in line with market expectations, this was better than what the MPC were expecting, and combined with the impact of a stronger currency on inflationary expectations, as well as concerns for the momentum of the pick-up in economic activity, prompted the MPC to surprise the market and cut the repo rate by 50 bps to 6.5%. The latest revenue and expenditure data released by SARS also looked very positive for February, but it is still too early to tell whether this will be maintained.

During the quarter, the 7 - 12 year sector of the index performed best with a return of 2.31%. The rand ended the quarter stronger and ended up 1.5% against the US dollar and 3.9% stronger on a trade-weighted basis. South Africa's country risk premium, the yield spread of South Africa's dollar-denominated bonds over US treasuries, widened by 11 bps to 1.5% for the quarter. Global bond yields ended the quarter mixed. The US 10-year was 1 bp firmer at 3.84%; euro area bonds fell 31 bps to 3.08%; and UK bonds fell 8 bps to 3.93%.

The current duration of the portfolio has been brought closer in line with that of the ALBI duration of 6. We see value in credit at the current levels and have been increasing our credit exposure to selected banks and State-Owned Enterprises.

Although bonds are showing value with implied inflation now at levels around 5.8%, the weak fiscal position has not changed and funding pressures are expected to remain, which could result in further upward pressure in bond yields.

We have looked to enhance yield in the portfolio by adding credit exposure at the current attractive credit spreads. We have swapped out our inflation-linked exposure as we see the risks being that inflation prints lower over the coming months, which would erode the benefits of the positive inflation carry. Although we are seeing value in bonds, the increased supply of RSA bonds does pose an upside risk to yields, and would be a concern for any sustainable rally in bond yields.

The November meeting of the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) passed without incident with the members voting unanimously to leave the repo rate unchanged at 7%. The SARB's inflation outlook has remained unchanged since the previous meeting with CPI still expected to fall within the target band on a sustained basis in the second half of 2010 and to remain there until the fourth quarter of 2011, during which it is projected to average 5.5%. The forecast, however, only assumes electricity tariff increases of 25% per annum in 2010 and 2011, while Eskom has applied for increases of 35% per annum for the next three years.

The rand continued to trade in a tight range of R7.30 -R7.50 to the US dollar. Demand for resources and carry trade transactions kept the rand buoyant. PPI fell by -1.2% year-on-year in November, versus the -3.3% drop measured in October. Private sector credit extension dropped to -1.59% in November from -0.42% in October. Money supply also continued to drop from 2.7% to 0.6%.

At the end of December, despite some economists forecasting a rate cut in Q1 2010, the market was pricing in flat rates going forward, with the chance of rates starting to rise in approximately 12 month's time. Given the current market outlook, we are not seeing value in the longer end of the curve and will continue to remain short at these levels. Credit exposure has been increased, but remains conservative in selected issues where higher yield could be locked-in.

Local bond yields were marginally weaker in the short/medium sectors while the long end sold off on sustained funding pressures. The benchmark R157 was 9 basis points (bps) higher at 8.39% while the long dated R209 was 34.5 bps higher at 8.75%. The ALBI performance for the quarter ended December was 1.08%. The 1 -3 year area was the best performing sector for the quarter and the 12+ year area was the worst performer. The ALBI underperformed cash by 77 bps.

During the quarter, the rand was stronger but not without volatility. It ended up 1.5% against the US dollar and 1.2% stronger on a trade-weighted basis. South Africa's country risk premium, the yield spread of South Africa's dollar-denominated bonds over US treasuries, narrowed by 53 bps to 1.39% for the quarter ended December. Global bond yields ended the quarter sharply weaker in the US, Europe and the UK. The US 10-year yield rose 53 bps to 3.84%; euro area bonds rose 19 bps to 3.39%; and UK bonds rose 43 bps to 4.01%.

The current duration of the fund has been brought closer in line with that of the ALBI duration of 5.99. We see value in credit at the current levels and have been increasing our credit exposure to selected banks and State-Owned Enterprises.

Although bonds are showing value with implied inflation now at levels around 6%, the weak fiscal position has not changed and funding pressures are expected to remain which could result in further upward pressure in bond yields.

We have used the recent weakness in bond yields to reduce our short duration relative to the ALBI. We have looked to enhance yield in the fund by adding credit exposure at the current attractive credit spreads.

We have swapped out our inflation-linked exposure as we see the risks being that inflation prints lower over the coming months, which would erode the benefits of the positive inflation carry.
Although we are seeing value in bonds, the increased supply of RSA bonds does pose an upside risk to yields, and would be a concern for any sustainable rally in bond yields.