The All bond Index gained 1.1% for the 3rd quarter while the yield curve steepened. The respective returns were: 1-3 year 1.8 %, 3-7 year 1.5 %, 7-12 year 1.0% and 12+ years 0.9 %.
Inflation linked bonds gained 0.9 % over the quarter, while cash returned 1.57%.

The third quarter of 2015 developed the picture of a weakening global economy. China took stimulatory action by devaluing its currency in a deliberate attempt to price its exports more competitively. Global markets responded poorly to this active acknowledgment of their concerns. With a weak and volatile economic global backdrop, market activity reflected increasing doubt that the US Federal Reserve Bank would lift rates off the 0.00 % level they have been at since the 2008 financial crisis.

US economic data encouragingly reflected a recovering American economy. Almost all employment metrics during the quarter were approaching target levels and Q2 GDP showed strong growth of 3.90 % (quarter on quarter (annualised)). It was the absence of concurrent inflation that was of concern. At its monetary policy meeting on September 17 the Fed ultimately decided against a rate increase with chair Janet Yellen citing the global slowdown and stubborn low inflation levels as the primary reasons for this decision. Subsequent to quarter end the data for job creation has been disappointing.

The oil price, though volatile, remained lower than had been forecast, ranging between $42 and $55 per barrel due in main to increased supply.

Concern around a Greek Eurozone exit subsided somewhat as an inclusive deal became more probable.

In July the South African MPC hiked the repo rate by 25 basis points to 6.00 %, a move that although clearly guided to by the committee had the market split over its timing. The September MPC decision was more straightforward, as Governor Lesetja Kganyago acknowledged increased global volatility and a slowing Chinese economy in his statement, which culminated in the unanimous decision to hold rates, mirroring the actions of the Fed a few days earlier.

The MPC noted the negative surprise to Q2 GDP which contracted at -1.30 % (quarter on quarter (annualised)). Inflation is forecast to peak in the first quarter of 2016 at a revised 6.70 %. Overall, risks to inflation are to the upside and primarily due to the currency. From 12.25 in July the Rand weakened to end the quarter at 14.00 per Dollar, a significant depreciation caused by a reduction in global risk allocation to emerging markets and the weaker domestic economic picture. The Governor confirmed commitment to a data dependent path of gradual policy normalisation.

South African bond yields moved marginally higher over the quarter to reflect concerns around emerging markets. Brazil had its credit rating cut to junk status, re-igniting questions around the South African investment grade rating. There is no indication that the Sovereign rating will be cut from investment grade to junk any time soon, unless the economy deteriorates significantly or the treasury's fiscal targets aren't achieved. The yield on the benchmark 2026 maturity R186 bond moved from 8.27 % to end at 8.44 % for the quarter. The yield curve steepened slightly while credit spreads were stable to slightly wider in a market of little new issuance and an increase in less transparent private placements.

The All bond Index gained 3.00% for the 1st quarter with the long end continuing to outperform. The respective returns were: 1-3 year +1.80 %, 3-7 year +2.30 %, 7-12 year +3.00 % and 12+ years +4.00 %.
Inflation linked bonds underperformed over the quarter gaining 0.20 %, while cash returned 1.55% over the period.

The US Federal Reserve Bank remains the focus of global markets as players attempt to forecast and position for the timing of their first interest rate hike. Every data release and monetary policy related commentary is scrutinised for its significance and influence. Yields rallied hard in January as data releases disappointed and the market pushed out its timing of the first hike. US 10year bond yields dropped from 2.20% to 1.65% in January. In February the yields rebounded higher, rising back from 1.65% to end February at 2.00%. The uncertainty continued during March and yields closed out the quarter at 1.92%. Employment data reflected strong growth for January and February. The Federal Reserve Bank commented that it no longer needs to be 'patient' as to the timing of the next hike if data continues to show economic conditions improving. However the extent of rate hikes will probably not be as much as previously thought.

The European Central Bank began its quantitative easing program in March and European yields have been in low to negative yield territory. This is expected to continue until European inflation hits 2%.

Oil prices bounced to end the quarter 30% higher at $60 per barrel, up from the lowest levels in January of $45 per barrel.

In South Africa Bond yields broadly mirrored global developments with a strong rally in yield of 0.97% in the 10 year bond (R186) from 8.00% to 7.03% and back ending the quarter close to 7.70%. The first Monetary Policy Committee meeting for 2015 saw large oil price related adjustments to the inflation forecast and growth was also marked lower. The Governor stated that the bar was high for fiscal tightening but that the next move in rates would be higher. After the oil price bounce, higher anticipated electricity tariffs a weaker Rand against the dollar and the uncertainty around 2015 public sector wage negotiations the picture began to change during February. A new Fuel levy(from the fiscal budget) and a higher oil price in February saw the benefits from the lower oil price reversed somewhat and the March MPC was considerably more hawkish. Domestic rates are expected to be increased later this year, but will of course follow global developments.

The ABSA Bond fund remains underweight duration compared to the index.

The All Bond Index lost 1.4% for the 2nd quarter and the curve flattened. The respective returns were: 1-3 year +1.0 %, 3-7 year -0.1 %, 7-12 year -1.2 % and 12+ years -2.9 %.

Inflation linked bonds outperformed over the quarter gaining 1.6 %, while cash returned 1.55% over the period.

US employment data was monitored closely by bond markets with hopes of it giving some insight as to the path and timing of the Federal Reserve Bank interest rate lift-off. After the disappointing figure for job growth in March, the following two months showed good signs of improvement. US yields moved higher as market expectations for a rate hike during 2015 increased. US 10 year yields moved up over the quarter from 1.95% to a high of 2.50%, before ending at 2.30% as fears around Euro zone stability intensified.

German 10 year bond yields moved to a low of around 0.00% in April before reversing and moving sharply higher during the quarter to end at 0.75% with the European economy beginning to show signs of a response to the monetary stimulus from the ECB. Greece and its potential default and exit from the Euro overshadowed markets during the quarter with the probability of a 'GREXIT' and its potential contagion effects adding to the uncertainty in global capital markets.

Oil prices were stable during the quarter. South African headline inflation turned up from its low of 3.9% with the MPC forecasting a breach of the upper side of the target band peak of 6% in the first quarter of 2016. The domestic Growth outlook remains weak and has been marked lower to 2.1% and 2.2 % for the next two years by the MPC and consumption expenditure is expected to be weak.

The MPC has issued increasingly hawkish statements, notwithstanding its acknowledgment of the limited ability of monetary policy to influence the demand factors that are driving inflation. It is very possible that there is a rate hike in July and/or September judging from this tone of guidance. The South African Bond market reflected global yield developments and moved higher over the quarter with the Benchmark R186 (2026 maturity) yields moving from 7.90% to end the quarter at 8.30%. Banks with increased regulatory capital requirements have been consistently issuing in the primary market adding pressure to corporate bond credit spreads, this is expected to continue but at a slower rate in future. The yield curve steepened slightly over the quarter.

The ABSA Bond Fund remains underweight duration compared to the Index.

The All bond Index gained 4.25% for the 4th quarter with the long end outperforming. The respective returns were: 1-3 year +2.5 %, 3-7 year +3.3 %, 7-12 year +4.1 % and 12+ years +5.4 %. Inflation linked bonds underperformed over the quarter gaining 2.2 %, while cash returned 1.55% over the period.

The US Federal Reserve Bank concluded its monthly bond buying program in October in line with expectations. The wording used by the Federal Reserve Bank Governor Janet Yellen is under close scrutiny for any clues as to when the first interest rate hike can be expected and what the pace of hiking or normalisation of interest rates will be. The outlook for rates swung dramatically during the quarter with 10 year treasury yields moving from a yield of 2.50% to 1.86% before ending the year at 2.20%. Market expectation is for policy action to be influenced by forthcoming data releases in 2015 though the global economic backdrop will be considered. The first hike is expected midway through the year, but the pace of hikes thereafter should be slower than previously priced. The US economy is leading the global recovery but the Governor will not want to be too aggressive in raising rates until consistent positive economic growth and inflation appears in the data.

European economic data deteriorated over the quarter, with measures to counter potential deflation being the focus of the European Central Bank. Interest rates were kept at all-time lows throughout the quarter with the deposit facility rate most notably at -0.20%. Growth forecasts were cut and fresh quantitative easing is likely to begin early in 2015.
China surprised markets by cutting rates in November as data releases indicate a slowing economy. This move contributed to demand for fixed income assets globally. The big global development over the quarter has been the price of oil which has moved from USD 97 per barrel to USD 55 which has major ramifications for inflation expectations going forward.

In South Africa the final Monetary policy committee meeting for 2014 was chaired by the new Governor Lesetja Kganyago. Comments made by him prior to his appointment were considered to be marginally hawkish so the market was moderately surprised with his accommodative monetary policy statement. With Oil prices as the major driver the MPC marked down its inflation forecast to average 5.9% in Q4 2014 and average 6.1% for the year from 6.2% previously. It marked down 2015 to an average of 5.3% from 5.7% with it bottoming out at 5.1% in the 2nd quarter. The MPC marked down GDP for 2014/2015/2016 to 1.4%/2.5%/2.9% from 1.5%/2.8%/3.1% respectively. With the currency as the only real risk to inflation, monetary policy seems set to remain accommodative for longer than previously thought. In the wake of the African Bank turmoil that struck bond markets in August, bond yields dropped significantly during this quarter as lower oil prices contributed to inflation expectations. The anticipated effects from the U.S economic recovery and the end of their quantitative easing has been balanced by expectations of new stimulus measures from Europe and China. The R186 (2026) yield dipped from 8.36% down to a low of 7.53% before ending the year at 8.00%.

The ABSA Bond fund has added to duration over the quarter but remains neutral to slightly underweight the ALBI benchmark