The ALBI gained 5% in the 3rd quarter of 2012. In the quarter, the 1 to 3 year area gained 1.7%, the 3 to 7 year area gained 4.4%, the 7 to 12 year area gained 6.1%, and the 12+ segment gained 5.8%. The yield on the benchmark R157 decreased from 5.99% to 5.44% in the 3rd quarter, and the yield on the longer dated R186 decreased from 7.94% to 7.55%. Cash, as measured by the STEFI, yielded 1.37% in the quarter, 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 700 basis points since their peak. Local inflation has been running at 5% over the past year, so is comfortably below the upper limit of the South African Reserve Bank's target range. However, the recent weakening in the Rand and the likelihood of above-inflation labour settlements, along with administered price increases make it unlikely that there will be further cuts in short-term interest rates. 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, as well as impacts from the weaker Rand, could still pose upside risks to inflation. Largely because of the recent violent labour unrest in the mining and transport sectors, the Rand has once again sold off rather sharply. Although the Rand was little changed against the dollar in the 3rd quarter, it weakened from 12.18 to 13.48 against the pound, and from 10.21 to 10.80 against the euro. As we have previously pointed out, 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 towards South African financial assets turns negative. Given the very low yields available on cash at the moment, bonds do not appear unattractive when compared to local cash. However, with massive fiscal deficits and debt issuances both in South Africa and around the world, there is upside risk to real global bond yields in the longer term. Globally, there is a "tug-of-war" between significant disinflationary forces (particularly sluggish economies and the reduction of private sector debt), and the continued issuance of sovereign debt (which should ultimately drive bond yields higher). Potential inflationary pressures in South Africa are far more significant. The ABSA Bond Fund remains cautiously positioned, with a duration that is slightly shorter than the All Bond duration.

The ALBI gained 5.2% over the quarter, driven by large inflows from offshore. The expected inclusion in October 2012 of South Afri-can bonds in the Citibank World Government Bond Index contributed to the inflow. In the June quarter, the 1 to 3 year area gained 2.9%, the 3 to 7 year area gained 4.7%, the 7 to 12 year area gained 6.0% and the 12+ segment rose by 5.7%. The yield on the benchmark R157 fell from 6.69% to 6.00% and the yield on the longer dated R186 decreased from 8.36% at the beginning of the pe-riod to 7.92% at the end of June.

Cash, as measured by the STEFI, yielded 1.42%, 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.

Domestic inflation has now moved below the 6% upper limit of the South African Reserve Bank's target range. Given the weakness of the economy there is speculation that the SARB may cut interest rates in the 2nd half of 2012.

The Rand weakened again during the quarter. The local currency weakened against the Dollar from 7.66 at the beginning of the quar-ter to 8.14 at the end of June, against the Euro from 10.22 to 10.33 and against the Pound from 12.18 to 12.80. As we have previously pointed out, 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 towards South African financial assets turns negative.

Given the very low yields available on cash at the moment, bonds appear to offer reasonable risk-adjusted returns compared to cash. However, with massive fiscal deficits and debt issuances around the world, 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 gained 0.12% in March 2012. In the month, the 1 to 3 year area gained 0.5%, the 3 to 7 year area gained 0.23%, the 7 to 12 year area gained 0.38%, and the 12+ segment lost 0.37%. The yield on the benchmark R157 was virtually unchanged in the month, but the yield on the longer dated R186 increased from 8.29% at the beginning of the month to 8.34% 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 has now breached the 6% upper limit of the South African Reserve Bank's target range. Consequently, short-term interest rates have, in all likelihood, 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 the dramatic sell-off in the Rand in September 2011 (along with any potential future weakness in the currency), could still pose upside risks to inflation. The Rand has stabilized somewhat after the afore-mentioned sell-off in September. In March, the local currency weakened against the Dollar from 7.44 at the beginning of the month to 7.64 at the end of the month, against the Euro from 9.91 to 10.18 and against the Pound from 11.86 to 12.24. As we have previously pointed out, 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 towards South African financial assets turns negative. Given the very low yields available on cash at the moment, bonds appear to offer better risk-adjusted returns than those available from cash. However, with massive fiscal deficits and debt issuances around the world, 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 gained 0.72% in December 2011, which means that for the year the Index gained 8.8%. In December, the 1 to 3 year area gained 0.63%, the 3 to 7 year area gained 0.81%, the 7 to 12 year area gained 0.67%, and the 12+ segment gained 0.9%. The yield on the benchmark R157 decreased from 6.77% at the beginning of the month to 6.75% at the end of the month, and the yield on the longer dated R186 increased from 8.45% at the beginning of the month to 8.5% 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 has now breached the 6% upper limit of the South African Reserve Bank's target range. Consequently, short-term interest rates have, in all likelihood, bottomed. Sustained cost-push pressures in South Africa, relating particularly to the higher electricity price 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 still pose upside risks to inflation.

The Rand has stabilized somewhat after the afore-mentioned sell-off in September. Although the local currency weakened slightly against the Dollar in December (from 8.08 at the beginning of the month to 8.15 at the end of the month), it strengthened against the Euro (from 10.88 to 10.58) and against the Pound (from 12.75 to 12.58). As we have previously pointed out, 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 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 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).

Foreign investors continue to invest into South African bonds, drawn by the high yields relative to the very low yields offered on USA and Ger-man bonds.

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