November proved to be another positive month for bond investors, with yields ending the month sharply lower. The benchmark R153 government bond ended at 8.20% assisted by a stronger currency after the recent decline in the US dollar. The local currency closed the month firmer at R5.80/US$, R11.05/British Pound and R 7.70/Euro. This despite less supportive economic data released during November. Inflation data was marginally higher than consensus estimates, reflecting a higher CPIX rate of 4.2%. Money supply and credit extension numbers suggest that consumers have the proverbial bit between their teeth and continue to borrow and spend at a higher than anticipated rate. Despite largely expansionary economic activity, bond yields trended lower as positive sentiment dominated. Market participants remain divided on whether or not the Monetary Policy Committee (M.P.C.) of the Reserve Bank will reduce interest rates at their next meeting in December. Underlying economic strength coupled with a negative current account deficit and rising international interest rates are some of the factors that must be weighed against a strong Rand, lower oil prices and a relatively subdued rate of inflation. The overriding factor to be considered by the M.P.C. is certain to be the outlook for inflation. International bond markets, particularly the U.S., gave back some of the gains of the last few months. Conflicting economic data released in the U.S. is sure to keep the bond market volatile. The yield of the benchmark U.S. 10-year Treasury bond ended the month close to 4.20%.

The modified duration of the fund is 4.67 at the end of November, which was largely in line with that of the ALBI.

After the unexpected rate cut by the Reserve Bank in August, it is interesting to note that market commentators have done an about turn, and expectations are now that interest rates could decline further. Contrary to consensus expectations, we believe that a further reduction of interest rates at the next MPC meeting would be imprudent, particularly as the growing current account deficit and high oil prices would ultimately lead to higher interest rates next year. Inflation data released in September was benign, with both the CPI and PPI numbers coming in at the lower end of economists' forecasts. Positive sentiment and the firmer Rand helped bond yields edge lower and the benchmark government R153 ended the month at 8.75%. The local currency closed the month firmer at R6.45/US$, R11.55/British Pound and R 8.05/Euro. International economic data released during August was largely mixed. Global inflation trends appear fairly muted for now, although the impact of higher oil prices is yet to be felt. Unemployment continues to be of concern, while economic activity appears to be quite robust in Asia. The focus over the forthcoming few weeks will be the U.S. elections, which will be held at the beginning of November. International financial markets are expected to remain volatile over this period, which will in turn impact the local market. The Monetary Policy Committee of the Reserve Bank will meet early in October. The outcome of this meeting will certainly increase volatility in the South African bond market. Looking forward, a period of consolidation is probable, as investors contemplate the next move in interest rates. The modified duration of the fund 4.83 at the end of September, which was greater than that of the ALBI. The fund remains fully invested.

The surprise decision by the Reserve Bank to lower the repurchase rate by 0.50%, at the August M.P.C. meeting fuelled a rally in an already buoyant bond market. This rally occurred despite a rapid decline in the value of the Rand, which ended the month at R6.67/US$, R11.85/British Pound and R8.05/Euro from a previous monthly close of R6.27/US$, R11.43/British Pound and R7.50/Euro. Subsequent economic indicators suggest that economic activity has been weaker than expected and that inflation appears to be at the lower end of expectations. The R153 benchmark government bond yield declined below 9.00%, ending the month at 8.85%. International trends appear to be in sync with those in South Africa, particularly with respect to growth rates, industrial production and unsatisfactory employment rates. The low interest rate policy of the U.S. has not delivered the stimulus that it was expected to, and whilst real rates are currently still negative, the Federal Reserve does not have that many options. Large coupon flows at the end of August and a liquid money market have added to the bullish outlook for bonds over the short-term. As has been noted over previous months, many institutions currently have a low exposure to bonds and are thus unlikely to be a source of supply of debt instruments. Looking forward, a period of consolidation is anticipated, particularly after the recent bout of strength.

The modified duration of the fund was 4.69 at the end of August and was in line with that of the ALBI 4.68. The fund remained fully invested.

April proved to be another disappointing month for bond investors, as both international and local yields continued to rise. The ALBI (All Bond Index) returned -0.81% for the month, further pressured by the Rand which declined against most of the major currencies, ending the month atR6.90/US$, R12.25/British Pound and R 8.30/Euro. International currency markets have continued to remain volatile and this is unlikely to change in the short-term as investors await what appears to be an imminent interest rate hike by the Federal Reserve. The decision to increase rates in the U.S. is likely to be triggered only when there is strong evidence suggesting that unemployment is improving. International inflation data has been on the increase and looks likely to deteriorate further as oil prices remain stubbornly high. Soaring energy prices are likely to have a negative impact on local inflation in the medium term. China now accounts for 7% of international oil consumption and this figure is projected to increase to 25% by 2010. Oil prices look set to have a greater indirect influence on bond markets for the remainder of the year. Until now, South Africa has largely been shielded from the negative impact of high oil prices thanks to the strength of the Rand over the recent past. Domestic economic data released during the month did not yield any unwelcome surprises. Negative international bond markets and a weakening currency were largely responsible for a weak bond market. The benchmark government R153 bond ended the month at 9.82%, up from the previous months close of 9.55% Local asset allocation has favored equities and cash over bonds for the past six months and there does not appear to be an adjustment in the offing. The bond market is expected to weaken further over the next few weeks as investors remain on the sidelines. The modified duration of the fund (4.42) at the end of April was marginally lower than that of the ALBI (4.80) and the fund remained fully invested.

The local bond market ended the last quarter of 2003 on a more subdued note as investors that were lured back into the equity market during the latter half of the year continued to avoid bonds. Despite an excellent return during December, the All Share Index (ALSI) only returned 16.1% for 2003, compared to an 18.1% return for the All Bond Index (ALBI). Interest rate expectations are far more sober, as investors digest the dirge of conflicting economic data released recently. International data suggests that the global economy continues to improve, a sign perhaps that the interest rate cycle is close to a bottom. While local disinflation and the relatively strong Rand have offered reason for optimism regarding a further decline in rates, poor money supply data, increasing credit extension and also a deteriorating trade balance suggest that the Reserve Bank is unlikely to alter its cautious stance. Bonds were largely ignored in favour of steadily rising equity markets, which resulted in the benchmark government R153 weakening to 9.02%. Despite this, the ALBI managed a gain of 0.11% for the month. The Rand firmed from its worst levels of the month, ending the year at R6.50/US$ and R11.50/British Pound. The modified duration of the fund at the end of December was close to that of the ALBI and the fund remained fully invested.