The ALBI gained 1.9% in 3Q13 with the belly of the curve outperforming. The 1-3 year segment of the yield curve gained 1.6%, the 3- 7 year 2.2%, the 7-12 year 2.1% and the 12years+ 1.5%. Nominal bonds outperformed Inflation linked bonds in the 3Q13 with Inflation linkers gaining 1.1%. The belly of the inflation link curve also underperformed with the 3-7 year losing 0.5% and the 7-12 year gaining only 0.8%. On a year to date basis nominal bonds delivered a 0.5% return outperforming inflation linkers (-1.8%). Since the U.S. fed hinted to the market in May 2013 that they may begin tapering their asset purchases, markets have been looking ahead to the start of the removal of these extraordinary monetary policy accommodation measures, and with the spectre of higher interest rates in the developed world, Emerging market sovereign bonds, corporate bonds, currencies and listed property were sold off. On the back of this we saw domestic bonds continue their sell off through July (-0.66%) and August (-1.3%). After the fed chose not to taper at their meeting in September, we saw bonds rally in the month of September (+3.9%). After reporting a total return of 5% up to the end of April 2013 and the subsequent sell off between May and September, SA nominal bonds still managed to deliver positive returns of 0.5% for the year to date outperforming inflation linkers (-1.8%). Large foreign holdings of domestic bonds coupled with a large current account and fiscal deficit have both added to the negativity in the market. With significant risks from U.S. Monetary and fiscal policy events coupled with the weak domestic economic prints makes us cautious on bonds for the rest of 2013.

The ALBI lost 2.28% in 2Q13 with the belly of the curve underperforming. The 1-3 year segment of the yield curve gained 0.35%, the 3-7 year -2.41%, the 7-12 year -3.29% and the 12years+ -2.41%. Nominal bonds outperformed Inflation linked bonds in the 2Q13 with Inflation linkers declining by 4.65%. Domestic bonds held up well against a barrage of negative domestic news in 2Q13, however a sell-off was sparked following the speech by Ben Bernanke, the U.S. Federal reserve chairman, where he indicated that the fed will start slowing the growth of its balance sheet, thus tapering the creation of new money in the system. Large foreign holdings of domestic bonds coupled with a large current account and fiscal deficit have both added to the negativity in the market. Given the depreciation in the currency, higher inflation expectations have also become a concern. Going forward we believe the large current account deficit and weaker currency will weigh on the Rand and in turn on bond yields. We remain cautious on Bonds in 2013 with expectations for the curve to steepen.

The ALBI gained 1% in 1Q13 with the belly of the curve outperforming. The 1-3 year segment of the yield curve gained 0.9%, the 3-7 year 0.9%, the 7-12 year 1.1% and the 12years+ 0.9%. Inflation linked bonds continued to outperform nominal bonds with a 1.57% return for the 1Q13. Domestic bonds held up well against a barrage of negative domestic news with foreigners continuing to support the local market, however not to the extent seen in 2012. The rand weakened from R/$ 8.47 at the beginning of the year to R/$ 9.24 at the end of the 1Q13. The current account deficit continued to widen in 1Q13 with expectations for a narrowing in 2013 remaining slim. Expectations for higher Inflation have also made investors nervous during the 1Q13 with expectations for CPI to breach the upper band of the Reserve banks inflation target over the next few months. Going forward we believe the large current account deficit and weaker currency will weigh on the Rand and in turn on bond yields. However we believe given the easy monetary policy in the developed world coupled with negative real rates of return in these markets, the global quest for yield will continue to cap domestic bond yields from blowing out significantly in 2013. We remain cautious on Bonds in 2013 with expectations for the curve to steepen.

The ALBI gained 2.3% in December 2012 with strong gains on the longer end of the curve. The 1-3 year segment of the yield curve gained 0.8%, the 3-7 year 1.34%, the 7-12 year 2.19% and the 12years+ 3.59%. Bonds delivered their best performance in 2012 since 2009, with the ALBI ending the year with a 16% total return. Long duration was the order of the day for 2012 as better returns were achieved on the longer end of the curve. The 1-3 year segment of the yield curve gained 8.3%, the 3-7 years 13.7%, the 7-12 years 18.4% and the 12 years + 18.8%. As global and domestic growth outlooks deteriorated and inflation outlooks improved in mid-2012, monetary authorities around the world took the opportunity to ease policy further which sparked a bond rally globally from March to July. South African bonds enjoyed the additional benefit of being included in the Citi Group World Government Bond Index for the first time which saw unprecedented inflows into the domestic bond market. Foreign purchases of South African bonds amounted to R92.6bn in 2012, with ownership of the domestic bond market estimated to be approximately 30% in foreign hands. Inflation-linked bonds were the strongest performers in 2012 outperforming vanillas in the year. Going forward we believe the large current account deficit, labour unrest and disruptions in the mining and agricultural sectors will all weigh on the Rand and in turn on bond yields. However we believe that the easy monetary policy in the developed world, coupled with negative real rates of return in these markets and the global quest for yield will continue to cap domestic bond yields from increasing significantly in 2013. We remain cautious on bonds in 2013 with expectations for the curve to steepen.