The decision taken by the Monetary Policy Committee (MPC) of the South African Reserve Bank to reduce the repo rate by a further 1%, to 11%, did little to stem the weakness in the bond market. The primary reason being that international bond markets remained weak. Optimism that global growth prospects are improving has fuelled bearish sentiment. Investors continued to switch out of bonds into equities, also contributing to higher bond yields. The benchmark government R153 bond ended the month yielding 9.55% from a previous monthly close of 9.40%. Inflation data released during August did not meet optimistic expectations and brought into question the extent of any further rate cuts. A cautious outlook is advised, as higher oil prices are seen as the greatest threat to both local and global inflation rates and the growth outlook. It is anticipated that the MPC will continue to maintain a cautious approach and there is a possibility that there may not be a rate cut at the next meeting to be held in October, but rather at the following meeting in December. Anticipation of further weakness in the bond market has prompted a reduction of the modified duration of the ABSA Bond Fund to 4.30.

The anticipated decline in the repo rate of 1.50%, fuelled already positive investor sentiment. Interest rates continued to decline across the yield curve, with the benchmark government R153 Bond ending the second quarter at a low yield of 9.10%. Shorter maturity bonds performed well, as the yield curve normalised. Despite a rebound in the US$ against a basket of currencies, the rand regained ground lost during May and the early part of June, ending the month at R7.50/US$, R12.45/£ and R8.70/Euro.

The release of better than expected South African inflation data, coupled with a decline in economic activity (as reflected in the GDP data), has raised expectations that the decline of interest rates has further to go. Low international interest rates are also supportive of local bonds as foreign investors may be tempted by relatively high nominal rates.

The market continues to anticipate another interest rate cut of at least 1% by the end of the third quarter, thus lending further support to the local bond market.

The Absa Bond Fund has a modified duration of 4.90 and is fully invested.

Continued rand-strength was the dominant feature of the local equity market, although the influence on bonds was far more muted. The benchmark R153 government bond was little changed by month end at 10.17%, as negative comments ascribed to the International Monetary Fund (I.M.F.) unnerved both local and foreign investors. Economic data released bolstered sentiment, as the odds of a rate cut in June increased. The inflation rate continued to decline albeit at a more moderate pace, lending further support to the bond market. Optimism that interest rates will be cut soon remains high, however, caution should be exercised, as the Governor of the Reserve Bank is likely to act only if he is convinced that the downward trend in inflation is sustainable.

As the bond market has largely discounted at least one interest rate cut, investors could expect a period of consolidation over the short-term. Money market rates are attractive at current levels, particularly on a risk-adjusted basis.

The Absa Bond Fund remained fully invested during April and the modified duration of the fund was above that of the BEASSA All Bond Index. Performance to-date is satisfactory.

February proved to be yet another positive month for bonds. An investor friendly budget, better than expected economic data, weak equity markets and a strong currency contributed to the good performance. The Producer Price Inflation of 8.10% year-on-year, which was much better than the market consensus of 9.20%, supported the bond market. While money market rates remained stable during the course of the month, bond yields declined. The benchmark R153 government bond yield ended the month at 10.20%, 20 basis points lower than the previous month. The Rand eased from it's best levels, closing at R8.10/US$ and R8.70/Euro.

Equity market volatility, both local and international, coupled with global uncertainty remains bond supportive. Disruptions in the international oil markets have the potential to further destabilise financial markets and are therefore a concern to investors. An increase in the petrol price is expected in the near-term.

The Absa Bond Fund remained fully invested during February and the modified duration of the fund was increased in excess of that of the BEASSA All Bond Index. The fund continues to perform towards the top end of its peers.

Positive economic data released during the course of January was one of the key drivers to lower bond yields, with the benchmark R153 government bond ending the month at 10.40%. Consumer Price Inflation and Producer Price Inflation were both lower than the market had anticipated. This, coupled with better than expected money supply and credit extension data, eased inflation expectations. The local currency also contributed to the positive sentiment, ending the month little changed at R8.62/US$ and R9.30/Euro. As equity markets remain volatile and geopolitical uncertainty continues, fixed income markets remain attractive and bond yields will continue to decline, particularly if the local currency remains stable. The ABSA Bond Fund remained fully invested during January and the modified duration of the fund was increased in excess of that of the BEASSA AllBond Index. Performance to date is very satisfactory.