International oil prices dropped to below $60pb in what is the only positive over the last quarter. However, the potential positive impact of the lower oil prices is offset by a weaker rand. The latest consumer inflation data was in line with expectations and is still forecast to breach the upper level of the target range. Producer inflation, however, was a bit of a shocker being measured at 9.2% against a consensus forecast of 8.4%.
Money market rates were higher than the previous month in expectation of a further repo rate hike in October.
The fund's duration has been short enough to benefit from the bearishness in the market. The fund is in a favourable position to benefit further, in the short-term, from the expected rate hike in October.
We expect a rate hike in October with the quantum of the hike being the only uncertainty. There is still potential for more rate hikes and the fund will continue to have a shorter duration.

SA petrol pump prices are heading for R7/l with the rand having weakened against all major currencies and international oil prices above $70pb. The rand ended the quarter at R7.16 to the US greenback, more than R1.00 higher than the previous quarter when it was at R6.15. The latest headline consumer inflation, CPI, was at 3.9% y-o-y (March: 3.9%) and 4,1% y-o-y (previous quarter 4.5%) for CPIX. Manufacturer's inflation as per PPI was at 5.9% y-o-y from 4.5% the previous quarter. Growth in both money supply and PSCE figures remain high. Money supply (M3) growth was strong at 24.20% versus the last quarterly reported number of 21.05% y-o-y, while growth in PSCE was at 22.70% yo- y from 21.54%. Money market rates were higher than the previous quarter as a result of the rate hike and potential further hikes.

Money market yields ended the month as follows:

30 Jun 2006 31 Mar 2006
3-month NCD 7.50% 7.00%
6-month NCD 7.85% 7.10%
9-month NCD 8.20% 7.15%
12-month NCD 8.50% 7.30%
3-month Jibar 7.571% 7.09%
Prime 11.00% 10.50%

The yield on the benchmark R153 government bond was up at 8.57% from 7.29% in March.

The yield on the fund was slightly up on the re-pricing of the shorterdated assets. The rate hike happened earlier than generally expected, but the portfolio was nevertheless well positioned to benefit from it. The general mix of assets in the fund showed a bias toward a rate hike and we expect the yield on the fund to reflect this over the first half of the new quarter.

There is evidence of a possible rate hike in either August or October. The currency and oil prices are key to the direction of inflation but credit spending may be enough reason for a further hike. The fund is well positioned to capitalise on this eventuality.

Headline consumer inflation and CPIX were below consensus market forecasts of 4,1% y-o-y and 4,6% y-o-y respectively in February. The actual numbers were 3.9% (previous quarter 3.4%) for CPI and 4.5% (previous quarter 3.7%) for CPIX.

Manufacturers' inflation as per PPI was unchanged at 4.5% y-o-y. Growth in both money supply and private sector credit extension figures remain high. Money supply (M3) growth was strong at 21.05% versus the last quarterly reported number of 16,4% y-o-y, while growth in private sector credit extension was at 21.54% y-o-y from 18.80%.

Money market rates were little changed from the previous quarter. Money market yields ended the month as follows:

31 Mar 2006 31 Dec 2005
3-month NCD 7.00% 6.95%
6-month NCD 7.10% 7.15%
9-month NCD 7.15% 7.20%
12-month NCD 7.30% 7.25%
3-month Jibar 7.09% 7.05%
Prime 10.50% 10.50%


The yield on the benchmark R153 government bond was marginally up at 7.29% from 7.23% in December.

The yield on the fund was steady. The portfolio has been positioned for flat rates with some bias towards rising rates. There is a strong suggestion that rates will remain flat for at least the next quarter. This is evidenced by a lack of volatility in rates, which has placed less emphasis on taking a rate view when selecting assets, but rather on optimising the yield curve.

While the Reserve Bank Governor confirmed that rates have bottomed, the timing of a rate hike is seen as much later in the year, and hence we will continue with the fund's current positioning.