The Fund invests in South African money market instruments with a term shorter than 13 months. These instruments can be issued by government; parastatals; corporates and banks. The Fund is managed to comply with regulations governing retirement funds. While capital losses are unlikely; they can occur if; for example; one of the issuers of an instrument held by the Fund defaults. In this event losses will be borne by the Fund and its investors.

We are in a difficult period of transition in the world. 2021 saw us attempt toemerge from the COVID-19 pandemic into recovery. Inevitably, parallels have been drawn with the post-World War II period of reconstruction, the errors in monetary policy of the 1960s and 70s, and the great inflation that followed. The persistence and severity of inflation became an intense source of global contention last year. After spending much of 2021 defending their stance that current inflation is “transitory”, the US Federal Reserve (the Fed) eventually acknowledged that it is time to retire the word.

Every bull market contains the embryo of the next bear market, and this time is no different. The rise of money supply and sovereign debt are now structural factors of developed markets, the seeds of which were planted long before the pandemic came to be. During the recent decade-long bull market, the Fed sought to offer low interest rates to borrowers to solve issues of corporate solvency with liquidity, leading to leveraged balance sheets and asset price inflation. This was not a noticeable problem for consumers as it was not hitting the real-world economy and consumer price inflation. During the pandemic, easy money and Federal asset purchases picked up enormous speed. The Fed also began to move into the realm of commercial banking by guaranteeing private sector loans. Finally, the smouldering situation was doused in lighter fluid when fiscal policy began to push COVID-19 stimulus cheques directly into the hands of US consumers.

For the first time in many years, US inflation – which fired up to 6.8% year-onyear in November – is well above South Africa’s at 5.5%, where credit lending has remained weak alongside our consumer. Vulnerability has nonetheless crept in via our failure to use improved commodity prices to drastically reduce our imprudent SA government debt levels. Even against this frail local backdrop, the South African Reserve Bank raised our overnight interest rate from 3.50% to 3.75% at the November 2021 Monetary Policy Committee (MPC) meeting. They cannot ignore the global dynamics at play.

SA money market investors entered 2021 earning the lowest level of overnight interest rates on record; the MPC’s move signalled a change in direction. The Reserve Bank’s quarterly projection model suggests that the SA repo rate should rise to 6.75% in 2024, which is still some time away. Will the actual path of interest rate normalisation be gradual or rapid? The MPC prefers the former, but they are, as ever, dependent on the data.

This is the conundrum of monetary policy – to be forward-looking and data-dependent simultaneously. One cannot wait to see the whites of the eyes of inflation before making a move. In 2021 the Fund was able to raise its weighted-average yield from all-time lows by investing cash at opportune times when inflationary fears fuelled a spike in market yields. At select times in the year, SA bank one-year fixed deposit rates rose to 5.5% and Government Treasury bills peaked at rates of 5.6% to 5.9% during a particularly weak auction. The Fund’s annualised yield before fees peaked at 4.98% in late November but settled a bit lower. We continue to look for opportunities to raise it further so that our investors might enjoy above-inflation returns