The ALBI has been strong in 2010, and gained a further 0.76% in September, with the longer end of the curve outperforming. In September the 12+ segment gained 1.36%; the 7 to 12 year area gained 0.59%; the 3 to 7 year area gained 0.29%, and the 1 to 3 year area gained 0.45%.

Cash, as measured by the STEFI, yielded 0.54%, the low yield being a result of the Reserve Bank's numerous past interest rate cuts. After the September cut, in aggregate the Monetary Policy Committee of the South African Reserve Bank (SARB) has now cut interest rates by 600 basis points since their peak. The high indebtedness of local consumers, coupled with the effects of the National Credit Act, job losses and the generally tough economic environment, will likely mean that despite rate cuts, personal consumption figures will remain depressed for some time.

High petrol, food and administered prices kept CPI above the SA Reserve Bank's upper limit of 6%, however the lower oil price (from its peak) and the generally slowing economy has provided some abatement on the inflation front, and inflation is now far below the 6% mark. Although interest rates have come down strongly, sustained cost-push pressures, and future weakness in the Rand may still be a potential problem area for inflation, particularly with South Africa's still large cur-rent account deficit. The SARB will continue to monitor the situation closely.

The yield on the benchmark R157 increased from 7.2% at the beginning of the month to 7.3% at the end of September. The yield on the longer dated R186 was virtually unchanged in September.

Currency volatility has traditionally been a significant aspect for South African in-vestors to consider, and the local currency has been exceptionally strong of late, particularly against the US Dollar. In September, the Rand strengthened from 7.28 to 6.95 against the Dollar, and from 11.25 against the Pound to 10.92, but weakened against the Euro from 9.33 to 9.47.

Over the next few months we expect that the movement in the Rand and bond market will be largely determined by flows into emerging markets, inflation expectations, yield differentials and prospects for future periods of risk aversion. We do not feel that bonds generally offer very compelling value at this stage - with massive fiscal deficits and debt issuances both in South Africa and around the world, we have felt for some time that there is upside risk to real global bond yields. A key issue is the extent to which further bond issuances can be absorbed by market participants However, there is a "tug-of-war" between the significant global disinflationary forces (particularly slowing economies and the reduction of private sector debt), and the continued issuance of sovereign debt (which should ultimately drive bond yields higher).

The ABSA Bond Fund remains cautiously positioned, with a duration that is slightly shorter than the All Bond duration.

The ALBI has been strong in 2010, and gained 0.27% in June, with the longer end of the curve underperforming. In June the 12+ segment lost 0.10%; the 7 to 12 year area gained 0.10%; the 3 to 7 year area gained 0.82%, and the 1 to 3 year area gained 0.70%. Cash, as measured by the STEFI, yielded 0.56%, the low yield being a result of the Reserve Bank's numerous past interest rate cuts. After the March cut, in aggregate the Monetary Policy Committee of the South African Reserve Bank (SARB) has now cut interest rates by 550 basis points since their peak. The high indebtedness of local consumers, coupled with the effects of the National Credit Act, job losses and the generally tough economic environment, will likely mean that despite rate cuts, personal consumption figures will remain depressed for some time. High petrol, food and administered prices kept CPI above the SA Reserve Bank's upper limit of 6%, however the lower oil price (from its peak) and the generally slowing economy provided some abatement on the inflation front, and inflation is now below the 6% mark. Although interest rates have come down strongly, future weakness in the Rand may still be a potential problem area for inflation, particularly with South Africa's still large current account deficit. The SARB will continue to monitor the situation closely. The yield on the benchmark R157 was virtually unchanged in June. The yield on the longer dated R186 increased from 8.94% at the beginning of the month to 9.04% at the end of the month. Currency volatility has traditionally been a significant aspect for South African investors to consider, and the local currency has been strong of late. In June, the Rand was virtually unchanged against the Dollar, but weakened against the Pound from 11.12 to 11.44, and strengthened against the Euro from 9.43 to 9.37. Over the next few months we expect that the movement in the Rand and bond market will be largely determined by inflation expectations, yield differentials and prospects for future periods of risk aversion. With rising fiscal deficits in South Africa and worldwide, a key issue is the extent to which further bond issuances can be absorbed by market participants. We do not feel that bonds generally offer very compelling value at this stage. The ABSA Bond Fund remains cautiously positioned, with a duration that is slightly shorter than the All Bond duration.

Bonds sold off strongly in the first half of 2009, and then moved sideways in a narrow channel in the second half of the year. The ALBI kicked off 2010 on a relatively subdued note, but yielded a more than 2% return in February, with the longer end of the curve outperforming. In February, the 12+ segment gained 2.28%; the 7 to 12 year area gained 2.31%; the 3 to 7 year area gained 1.57%, and the 1 to 3 year area gained 0.87%.

Cash, as measured by the STEFI, yielded 0.60%, the low yield being a result of the Reserve Bank's numerous past interest rate cuts. The Monetary Policy Committee of the South African Reserve Bank (SARB) has now cut interest rates by 500 basis points since their peak. However, the high indebtedness of local consumers, coupled with the effects of the National Credit Act, job losses and the generally tough economic environment, has seen personal consumption figures remain depressed for some time.

High petrol, food and administered prices kept CPI above the SA Reserve Bank's upper limit of 6%, however the lower oil price (from its peak) and the generally slowing economy provided some abatement on the inflation front, with inflation finally expected to dip below the 6% mark in the short term.

The yield on the benchmark R157 bond ended lower in February (at 8.17% as compared to 8.38% at the beginning of the month). The yield on the longer dated R186 decreased from 9.17% at the beginning of the month to 8.98% at the end of the month.

Currency volatility has traditionally been a significant aspect for South African investors to consider, and the local currency strengthened sharply in the prior year. In February the Rand weakened slightly against the Dollar - from 7.61 to 7.69; however it strengthened from 12.17 against the Pound to 11.73, and against the Euro from 10.56 to 10.48.

Over the next few months we expect that the movement in the Rand and bond market will be largely determined by inflation expectations, yield differentials and prospects for economic growth. With rising fiscal deficits in South Africa and worldwide, a key issue is the extent to which further bond issuances can be absorbed by market participants.

Although interest rates have come down strongly, future weakness in the Rand may still be a potential problem area, particularly with South Africa's gaping current account deficit. The SARB will continue to monitor the situation closely.

The ABSA Bond Fund remains cautiously positioned, with a duration that is slightly shorter than the All Bond duration.

Bonds sold off strongly in the first half of 2009, and were fairly choppy in the second half. The ALBI yielded a positive 1.2% return for the month, with gains coming across the curve, but particularly at the very long end. In December, the 12 year+ segment lost 1.91%; the 7 to 12 year area gained 1.05%; the 3 to 7 year area gained 0.82%, and the 1 to 3 year area gained 0.69%.

Cash, as measured by the STEFI, yielded 0.60%, the low yield being a result of the Reserve Bank's numerous past interest rate cuts. The Monetary Policy Committee of the South African Reserve Bank (SARB) has now cut interest rates by 500 basis points since their peak. However, the high indebtedness of local consumers, coupled with the effects of the National Credit Act, job losses and the generally tough economic environment, will likely see personal consumption figures remain depressed for some time.

High petrol, food and administered prices kept CPI above the SA Reserve Bank's upper limit of 6%. However, the lower oil price (from its peak) and the generally slowing economy provided some abatement on the inflation front, with inflation finally dipping below the 6% mark in November. We remain cautious on the outlook for inflation going forward, with administered prices and services inflation likely to remain high.

The yield on the benchmark R157 bond ended the month slightly lower at 8.39% as compared to 8.42% at the beginning of the month. The yield on the longer dated R186 decreased from 9.14% at the beginning of the month to 9.02% at the end of the month.

Over the next few months we expect that the movement in the bond market will be largely determined by inflation expectations, yield differentials and particularly supply of new bonds. With rising fiscal deficits in South Africa and worldwide, the shortage of government bonds that has characterized the local bond market for some time, will likely now be reversed.

The ABSA Bond Fund remains cautiously positioned, with a duration that is slightly shorter than the All Bond duration.