Bond rates ended the month approximately where they started, with the yield on the benchmark R153 bond moving down by 6 basis points from 8.69% at the end of August to 8.63% at the end of September. However, within the month there was considerable volatility, with a high of 8.86% and a low of 8.39%. The Rand again lost ground, falling from 7.19 to 7.74 to the US dollar during the month. Over the next few months the direction of movement for the Rand and bond market will be largely determined by the frequency and size of interest rate hikes from the SA Reserve Bank.

The Absa Bond Fund had a reasonable month, returning 1.5%.The All Bond Index gained 1.4% over the month, and 2.1% over the quarter, recovering a small part of the loss of the previous quarter. The Fund remains cautiously positioned, with a duration that is moderately underweight the All Bond duration.

Bond rates rose sharply during June, with the yield on the benchmark R153 bond rising by 104 basis points from 7.51% at the end of May to 8.55% at the end of June. This increase in bond rates followed the 50 basis point rise in official domestic short term rates, and fears that there may be further increases in short term rates, possibly as early as August. Rising yields in other countries, as well as weakness in the Rand, contributed to the rise in South African bond rates. Yields on US 10 year Government bonds rose from 5.06% to 5.19% over the same period. The Rand weakened from 6.70 to 7.15 against the US dollar over the month, from 12.55 to 13.22 to the British pound and from 8.62 to 9.09 Euros.

The All Bond Index lost 3.6% over the month. The Absa Bond Fund outperformed the Index, losing a lesser 3.2%. The Fund remains cautiously positioned, with a duration that is underweight the All Bond duration.

March was marked by a distinct lack of volatility in the local bond market despite continued weakness internationally. The recent weakness of international bonds included a sell-off of emerging market bonds. The US 10 year Treasuries edged towards 5% after Federal Reserve comments increased speculation that yields have still higher to go. The local benchmark R153 and R157 government bonds ended at 7.30% and 7.47% respectively. The Rand ended largely unchanged for the month and ended the quarter at R6.18/US$, R10.75/British Pound and R 7.50/Euro.

Local short-term interest rates are likely to remain unchanged in the near term although the latest comments from the Reserve Bank governor suggest that caution must be exercised at current levels. The risk is certainly to the upside as international yields rise and local funding requirements are likely to increase the supply of bonds.

Oil (and other commodity) prices have remained high, which has prompted the Federal Reserve and the European Central bank to remain hawkish in the near-term. Signs of inflation are starting to emerge at the producer level, but it remains to be seen if increases are passed on to the consumer or absorbed by producers and thus squeeze margins.

The modified duration of the fund was 4.69 the end of March, lower than that of the ALBI.

The Monitory Policy Committee met during the month and the decision was taken to leave interest rates unchanged. The MPC noted that the inflation outlook had improved since the previous meeting, supported by lower oil prices, moderate wage growth and still no sign of any second-round effects on inflation. Bond yields rallied on the back of the announcement and were further supported by the lack of bond issuance, strong rand, low liquidity due to the festive holidays and a better than expected economic backdrop that quelled fears of higher yields in the short term. Bond yields reached new lows as the benchmark R153 and R157 government bonds ended the month and the year at 7.31% and 7.46% respectively.

The rand continued to perform well and strengthened against a basket of currencies, ending the month at R6.325/US$, R10.855/British Pound and R 7.47/Euro. The latest Quarterly Bulletin confirmed that domestic spending remains the main driver of growth, while the current account deficit has widened but is still comfortably financed by capital inflows.

Strong fiscal policy and accommodative monitory policy should see interest rates steady in 2006.

International bond markets staged a comeback and recouped most of their losses of the previous month. U.S. Treasuries ended stronger with the benchmark 10-year treasury yield closing the month at 4.38%.

Local bonds are expected to remain firm due to the better than expected economic backdrop, low bond issuance and firmer currency. The modified duration of the fund stood at 4.79 as at the end of December.