Fund review
The Fund's size increased from R2.06 billion to end the quarter at R2.45 billion due to new inflows and positive market movement. The modified duration of the Fund was kept higher than the benchmark, which was positive for the Fund given the sideways movement in bond yields during the quarter. New inflows were invested in the long end of the yield curve to increase capital appreciation potential given the constructive view on yields. The Fund still maintained a higher weighting in the middle sector of the yield curve. The credit positioning remained overweight in comparison to the benchmark. Exposure in inflation linked bonds was maintained around 7% of the portfolio during the quarter as real yields declined.

Looking Ahead
The bond market spent the first quarter of 2013 sideways in a tight range as the forces influencing the market were largely kept balanced leading to the ALBI return of 1%. The positive return was achieved despite some of the negative developments affecting interest rates market in the US where the US 10 year treasuries touched a high of 2.08% before declining to 1.85% on growth concerns and flight to safety trades. The main debate centred on the timing of the withdrawal of stimulus packages as the economy is expected to grow better than previous years. The cost of insuring South African sovereign debt increased from 210 basis points to 259 basis points. The resurgence of the Euro crisis as a result of Cyprus seeking a bailout led to demand for safe haven assets and weakness in the local currency. Despite the negative sentiment in the currency markets, bond yields remained well bid into weakness leading to a breakdown in correlations to the Rand. Foreigners were net buyers of South African bonds to the tune of R14 billion during the first quarter of 2013. The yield curve remained relatively steep as the government intends to issue longer dated bonds. Inflation linked bonds continued to perform well.

Looking forward, the local bond market yields are likely to continue trading sideways with monetary accommodation providing the bid and the threat of the removal of global monetary stimulus creating a floor. The SARB MPC left rates unchanged but indicated that the weakness in the local currency played a major role in their decision. Because of global developments in the form of currency wars, as a result of Japan and European central banks looking to add further stimulus into the system, risky assets are expected to have an underpin. This will benefit risky assets and help governments fund their deficits. Bond returns for 2013 are still expected to surpass inflation.