The ALBI lost 2.09% in September 2011, but the Index is up by 5.1% for the first nine months of the year. In September, the 1 to 3 year area lost 0.27%, the 3 to 7 year area lost 1.02%, the 7 to 12 year area lost 2.05%, and the 12+ segment lost 3.64%. The yield on the benchmark R157 increased from 6.52% at the beginning of the month to 6.99% at the end of the month, and the yield on the longer dated R186 increased from 8.11% at the beginning of the month to 8.60% at the end of the month.

Cash, as measured by the STEFI, yielded 0.47%, the low yield being a result of the Reserve Bank's numerous past interest rate cuts. In aggregate the Monetary Policy Committee of the South African Reserve Bank (SARB) has cut interest rates by 650 basis points since the peak.

We do point out that local inflation (and consequently short-term interest rates) has bottomed. Sustained cost-push pressures in South Africa, relating particularly to the higher electricity and other administered prices and wage-cost inflation, along with the dramatic sell-off in the Rand in September (along with any potential future weakness in the currency), could pose upside risks to inflation.

In September the Rand plummeted against the Dollar from 6.99 at the beginning of the month to 8.09 at the end of the month, and against the Pound from 11.31 to 12.60. The Rand's losses against the Euro were a more muted, with the local currency weakening from 9.97 to 10.83. As we have previously pointed out, history has shown that the Rand can both strengthen beyond consensus ex-pectations, and also sell off strongly in a short space of time, particularly when sentiment of foreign investors towards South African financial assets turns negative. We have been cautioning that the significant capital inflows experienced by South Africa over the past 18 months could easily experience sudden reversals.

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 signifi-cant 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 gained 0.16% in June 2011, which means that the Index has gained 2.3% for the first half of the year. In June, the 1 to 3 year area gained 0.54%, the 3 to 7 year area 0.57%, and the 7 to 12 year area 0.09%, whilst the 12+ segment lost 0.3%. The yield on the benchmark R157 decreased from 7.53% at the beginning of the month to 7.50% at the end of the month, and the yield on the longer dated R186 increased from 8.50% at the beginning of the month to 8.59% at the end of the month.

Cash, as measured by the STEFI, yielded 0.47%, the low yield being a result of the Reserve Bank’s numerous past interest rate cuts. In aggregate the Monetary Policy Committee of the South African Reserve Bank (SARB) has cut interest rates by 650 basis points since their peak.
We do point out that local inflation and consequently short-term interest rates seem now to have bottomed. Global food and oil prices have increased strongly from their lows of the past couple of years. Sustained cost-push pressures in South Africa, relating particularly to the higher oil price and wage-cost inflation, along with potential future weakness in the Rand, could pose upside risks to inflation.

Currency volatility has traditionally been a significant aspect for South African investors to consider. In June the Rand strengthened against the Dollar from 6.81 at the beginning of the month to 6.76 at the end of the month, from 11.14 to 10.83 against the Pound, and from 9.81 to 9.80 against the Euro. History has shown that the Rand can both strengthen beyond consensus expectations, and also sell off strongly in a short space of time, particularly when sentiment of foreign investors deteriorates towards South African financial assets. The significant capital inflows experienced by South Africa over the past 18 months could easily experience sudden reversals.

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 signifi-cant 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 gained around 0.5% in March 2011, with only minor variations in the various maturity groupings. The 1 to 3 year area gained 0.55% in the month, the 3 to 7 year area 0.42%, the 7 to 12 year area 0.6% and the 12+ segment gained 0.41%. The yield on the benchmark R157 increased slightly, and the yield on the longer dated R186 was virtually unchanged from the beginning of the month (at 8.97%).

Cash, as measured by the STEFI, yielded 0.47%, the low yield being a result of the Reserve Bank's numerous past interest rate cuts. In aggregate the Monetary Policy Committee of the South African Reserve Bank (SARB) has cut interest rates by 650 basis points since their peak. Whilst high food and administered prices kept CPI above the SA Reserve Bank's upper limit of 6% for a long time, the generally slowing economy and stronger Rand provided significant abatement on the inflation front. Inflation has been running at 3.7% over the past year. However, although interest rates have come down strongly, sustained cost-push pressures, particularly related to administered prices and rising food and oil prices, along with potential future weakness in the Rand may well mean that inflation, and consequently interest rates, have now bottomed. The SARB will certainly continue to monitor the situation closely.

Currency volatility has traditionally been a significant aspect for South African investors to consider; with the Rand strengthening yet again in March, from 6.98 to 6.75 against the Dollar, from 11.34 to 10.84 against the Pound, and from 9.62 to 9.58 against the Euro. As we have pointed out previously, history has shown that the Rand can sell off strongly in a short space of time, and the significant capital inflows experienced by South Africa over the past 18 months could easily experience sudden reversals. This should be borne in mind by bond investors, particularly in light of South Africa's current account deficit. Other factors which could influence the bond market include inflation expectations, yield differentials and prospects for future periods of risk aversion.

Despite the recent sell-off, we do not feel that bonds generally offer very compelling value at this stage - with massive fiscal deficits and debt issuances both 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 was strong in 2010, and gained a further 1.73% in December, with gains coming across all durations of the yield curve. The 1 to 3 year area gained 0.62% in the month, the3 to 7 year area 0.62%, the 7 to 12 year area1.93% and the 12+ segment 2.14%. The yield on the benchmark R157 decreased from 7.46% at the beginning of the month to 7.31% at the end of the month. The yield on the longer dated R186 decreased from 8.43% at the beginning of the month to 8.29% at the end of the month.

Cash, as measured by the STEFI, yielded 0.49%, the low yield being a result of the Reserve Bank's numerous past interest rate cuts. After the Monetary Policy Committee of the South African Reserve Bank (SARB) cut interest rates by a further 50 basis points in No-vember, in aggregate interest rates have now been cut by 650 basis points since their peak. Whilst high petrol, food and administered prices kept CPI above the SA Reserve Bank's upper limit of 6% for a long time, the generally slowing economy and substantially stronger Rand has provided significant abatement on the inflation front. Inflation is now well 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 future inflation, and the SARB will continue to monitor the situation closely.

Currency volatility has traditionally been a significant aspect for South African investors to consider, and the local currency has been exceptionally strong of late. In December, the Rand strengthened from 7.09 to 6.62 against the Dollar, from 11.04 to 10.30 against the Pound, and from 9.22 to 8.84 against the Euro. History has shown that the Rand can sell off strongly in a short space of time, and we do point out that the significant capital inflows experienced by South Africa over the past 18 months could reverse at some stage in the future. This should be borne in mind by bond investors, particularly in light of South Africa's current account deficit. Other factors which could influence the bond market include 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 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.