Term interest rates have increased slightly over the past month and are now discounting zero probability of any further interest rate cuts. We do not expect the Monetary Policy Committee (MPC) to either cut or hike rates in the near term. Because of this view, we see value in the six-month area of the money market yield curve and in floating rate notes. If the MPC decides to increase rates in the next few months the Fund will not be well positioned for this due to the fairly long duration of 87 days. However, we believe the risk of this happening is low and the upwardly sloping yield curve provides ample compensation for this risk. The duration of the fund is 87 days.

The Monetary Policy Committee decided to keep the repo rate unchanged at 7.5% at its meeting on 25 June. This decision took the market by surprise as most investors expected a 50 basis point cut in interest rates. The money market curve is now pricing in no further rate cuts and the longer end of the curve is pricing in the possibility of interest rate increases. We believe it is unlikely that the Monetary Policy Committee will raise rates in the near term as the economy is very weak and the inflationary pressures will probably abate. The strong rand, together with low international food prices and weak demand, should result in a lower inflation rate.

The duration of the Portfolio is 85 days as we see value in the longer end of the money market yield curve.

The announcement by the Reserve Bank on 18 March that the Monetary Policy Committee will meet monthly and the next meeting will be brought forward to 24 March caused short-term interest rates to rally about 60 basis points. The MPC proceeded to reduce rates by 100 basis points as expected on the 24 March meeting. Since the interest rate cut the three and six month area of the curve has continued to rally but interestingly 12-month negotiable certificates of deposits (NCDs) have sold off to the pre 18 March level. The market is still pricing in a further 200 basis points of rates cuts albeit with a little less conviction. We believe 200 basis points of rate cuts is the most likely outcome.

We have reduced the duration of the fund to 62 days as we do not favour the risk return profile assets longer dated than six months, however the relative attractiveness of the longer dated assets is beginning to improve.

Money market interest rates have stabilised since the November, December rally. The 12 month NCD (negotiable certificates of deposit) is now discounting 400 basis points of interest rate cuts. The market is pricing in these aggressive interest rate actions because of the very positive outlook for inflation. Consumer price inflation should fall rapidly over the next few months as the benefits of lower commodity prices are realised. The second driver of the positive inflation outlook is the re-weighting of the CPI basket which takes place in January.
We have allowed the duration of the Fund to fall over the past month as the riskreward equation does not favour buying long-dated assets. We believe the 400 basis points of rate cuts that longer-dated money market assets are anticipating is a bestcase scenario. The Monetary Policy Committee could possibly be more conservative and reduce interest rates to a lesser extent, favouring a shorter duration.

The duration of the fund is 62 days.