The All Bond Index increased by 3.7% over the 3rd quarter. The respective total returns were: 1-3 year +2.6%, 3-7 year +3.0%, 7-12 year +3.6% and 12+ years 3.9%.

Inflation linked bonds returned 1.4% over the quarter, while cash earned 1.8%.
The Federal Reserve Banks' FOMC kept rates steady through the quarter while seeming surprised with stubbornly low inflation against a strong labour market. The tone of the Fed grew more hawkish toward the end of the quarter. They signalled that Federal Reserve balance sheet reduction would commence this year as expected but the Fed's tone turned more hawkish than was anticipated signalling the strong possibility of another policy rate hike in the last quarter. The US 10 year bonds started the quarter at 2.3% yield, moved down to 2.0% and reversed back to end at 2.3% again.

The European Central Bank kept its policy rates unchanged at both of its monetary policy meetings but comments from governor Mario Draghi suggested conditions were right to begin tapering back on their quantitative easing program in the imminent future.
The oil price moved from $49 to $55 per barrel over the quarter.

Politics remains front and centre domestically as expected into the December ANC elective conference that will determine who will take the party forward from here.

For the MPC it was a quarter of surprises for markets. July's meeting saw the MPC cut rates by 25 basis points in a move that was against consensus. Based on the improved inflation profile the committee agreed that a cut was required. This trend was not continued at the September meeting as the committee chose to keep rates on hold in a split decision siting increased risks to inflation from the currency into year end.

2nd quarter GDP figures rebounded to 2.5% (QoQ SA annualised) breaking out of the recession (-0.6% and -0.3% for the previous 2 quarters). Growth is expected to remain weak for the remainder of the year despite an improved global growth backdrop as domestic business and investor confidence remains low amidst political uncertainty.

The Bond fund maintained a moderately defensive position over the quarter and will continue to adjust its duration and exposure as required in this heightened risk environment.

The All Bond Index increased by 1.5% over the 2nd quarter. The respective total returns were: 1-3 year +2.0%, 3-7 year +2.4%, 7-12 year +2.4% and 12+ years 1.0%.

Inflation linked bonds returned 1.0% over the quarter, while cash earned 1.9%.

The Federal Reserve Banks’ FOMC continued with their hiking course delivering another 25 basis point hike to the policy rate at their June meeting. Focus has now turned to the running down of the Fed’s balance sheet, i.e. the pace at which their maturing bonds bought for quantitative easing are redeemed without being rolled. Since this will additionally tighten monetary conditions, the timing of future interest rate normalisation will be cognisant of this asset reduction. The US 10year bonds started the quarter at 2.4% yield and moved down to 2.1% where they reversed after the June FOMC and the described developments.

The European Central Bank kept its policy rates unchanged at both of its monetary policy meetings but comments in June from Mario Draghi hinted at improved economic conditions opening the door for the tapering back of their own quantitative easing program and sent global bond markets into defensive mode in June. The Bank of England Governor and a renowned dove on their own MPC signalled the time approaching for hikes of their own adding to a more hawkish global sentiment developing in bond markets. The oil price moved from $55 to $49 per barrel over the quarter.

For domestic fixed income markets the 2nd quarter of 2017 was dominated by the ratings agencies and political developments. In a quick response to the cabinet re-shuffle and their assessment of its motivation, Fitch and Standard & Poors downgraded their foreign currency ratings to junk and the local currency rating to junk and one notch above junk respectively. Moody’s downgraded both ratings to one notch above junk and have the outlook to this as negative.

Release of SA GDP figures for the 1st quarter confirmed a technical economic recession. Investment confidence figures released over the quarter suggest that growth will be weak due to political uncertainty leading into the elective conference at the end of the year and simple policy paralysis when it comes to devising any growth focussed policies. Foreign investors searching for yield maintained inflows for the quarter of R21,1 billion.

The hawkish tone of the MPC softened over the quarter, in essence confirming that they believe we have come to the end of the hiking cycle. CPI has decelerated significantly and the forecast outlook is within the target range. Lower inflation combined with weak economic growth opens up the consideration of rate cuts, the timing thereof is not that obvious. Were it not for increased political risk and investor uncertainty, the conditions seem perfect for such cuts. The question is however: what would the extent of the cutting cycle be once it begins without it being reversed too quickly should conditions reverse and what targeted real rate of return the MPC believe as appropriate to attract foreign investment while simultaneously assisting the economy.

The Bond fund maintained a moderately defensive position over the quarter and will continue to adjust its duration and exposure as required in this heightened risk environment.

The All Bond Index increased by 2.5% over the 1st quarter. The respective total returns were: 1-3 year +2.6%, 3-7 year +3.4%, 7-12 year +2.6% and 12+ years 2.2%.

Inflation linked bonds lost 0.5% over the quarter, while cash returned +1.9%.

The first quarter saw investors attempt to gauge the size and shape of US fiscal policy under the new Trump administration. There were two FOMC meetings over the quarter with February seeing a 25bp hike to the policy rate. Fed Governor Yellen’s accompanying guidance was slightly more dovish than the market had been expecting and as a result US 10 year bond yields ended the quarter lower at 2.39% ytm.

The European Central Bank kept its policy rates unchanged at both of its monetary policy meetings.

Oil ended the quarter largely unchanged at $52.90 per barrel.

In South Africa the bond market was poised to have an extremely strong quarter were it not for continued political risk surprises. The R186 yield had rallied from 8.95% in January to 8.25% an almost 5% capital gain. The surprise recall of the Finance Minister and his deputy caused mass panic for domestic investors as fears of a cabinet shuffle were all but confirmed. In an announcement made at midnight on the eve of 31st March the re-shuffle was announced. The market retraced 50% from its best levels ending up only 2.5%. Fears of ratings agencies downgrading the sovereign ratings were quickly being factored in.

The March MPC occurred just prior to the re-shuffle announcement, the tone had changed in anticipation already with a more hawkish outlook based on the political uncertainties and the price volatility that would result. The inflation outlook had improved in the SARB forecast however risks were seen to the up-side.

The FRA market which had at one point been pricing in almost two interest rate cuts this year had returned to pricing the next move in rates higher by the end of the quarter. We expect monetary policy rates to remain flat for the year ahead.

Appetite for emerging market risk has increased as the markets expectations of US policy change somewhat. Foreign investors bought R19 million of bonds in March.

The Bond fund maintained a moderately defensive position over the quarter and will continue to adjust its duration and exposure as required in the heightened risk environment.

The All Bond Index increased by 0.4% over the 4th quarter. The respective total returns were: 1-3 year +1.4%, 3-7 year +1.1%, 7-12 year +0.7% and 12+ years 0.0%.
Inflation linked bonds lost 1.0% over the quarter, while cash returned +1.9%.
United States political developments were the focus for the quarter as Donald Trump won the presidential election, in a move seen to reflect the general dissatisfaction with the state of the economy and the effects of globalisation. Markets expect the new administrations economic policy to be more fiscally stimulatory and began pricing in a more hawkish monetary policy outlook. At the December FOMC the Federal Reserve Bank raised the repo rate by 25 bp's in a move that was completely in line with expectations. The US Dollar strengthened over the quarter as a result, with investors moving out of risk assets into the end of the year.

The European Central Bank extended (but trimmed) its quantitative easing policy, reducing the monthly repurchase amounts from EUR 80bn to EUR60bn whilst extending the program until at least December 2017.

Oil Traded in a range of $44 to $58 per barrel over the quarter ending around $55 as oil producing countries agreed to cut production for the first time in 8 years taking commodity prices higher with it.

South African political risk remained heightened over the quarter and anticipation of any adjustment to the sovereign credit rating seemed to contain the positive ground made over the first three quarters for the bond market. The National Prosecuting Authority (NPA) announced that it would be prosecuting the Finance Minister Pravin Gordhan on charges of fraud which it then reversed less than a month later. South Africa survived being cut to speculative investment grade by the ratings agencies but the local currency rating was downgraded by S&P and looking forward all three ratings agencies have the outlook as negative. Foreign investors sold out of R36bn worth of South African bonds over the quarter leaving foreign buying for the year at R26bn.

The fourth quarter hosted the final meeting of the South African Reserve Bank's Monetary Policy Committee. The committee reverted to a more cautious hawkish position compared with the previous meetings assessment that the end of the hiking cycle could have been met. The MPC highlighted the risks to the currency and the inflation outlook. Subdued growth and an inflation level that is forecast to remain closer to the upper level of the target range has left market expectations for monetary policy over the next two years flat.
The Bond fund maintained a moderately defensive position over the quarter and will continue to adjust its duration and exposure as required.