For a while now, our focus has not really been on the movements in the USD-ZAR currency, however, the relentless advance of the rand has certainly forced its way into way again. It is obviously a detractor of value in this fund.

Global bond markets did not behave too badly over the month, as yields were more stable across developed markets after a more volatile month in October. We fear this is perhaps the calm before the storm. The European Central Bank hiked rates for the first time in five years, citing fears of inflation. We are of the view that this action on their part is too pre-emptive, and will end up being disruptive of the market, rather than contributing to underlying price stability.

The US economy continues to 'hum' along at a steady pace, and has managed to absorb many inflationary shocks thus far. Even so, there is perhaps a bit too much complacency creeping back into the market regarding inflation. This may contribute to short-term weakness in US bonds. However, for the longer term, the view is that the curve will invert. The fund will look to position accordingly over the coming months.

October was a relatively fruitful month for managers with a mildly bearish positioning - the rise in yields certainly helped. In the U.S., there was a near uniform acceptance of the view we have held for a while, namely that the Fed will be hiking rates for a bit longer than the market has been discounting to date. While it is heartening to be correct, we caution that it may well be a bit early to declare victory. The current cycle has some way to run, and much may still happen to derail the view. Furthermore, the market has shown itself to be flitting between extremes for the better part of the year, and the current drift in yields may be little more than noise. In Europe, the move higher seems less well argued, and we continue to believe that European bonds should be a better bet than U.S. bonds. The fears of a start to the rate hike cycle in Europe are probably overdone. Even if there is a start to a rate hike cycle, the probability of those hikes proceeding at the vigorous pace set by the Fed is smallish at this stage. Of all the markets where higher yields have materialised, Japan is the market where we think much more is needed. Given how low real and nominal yields have sunk, and how far the correction will have to be once deflation is finally defeated, we are happy to keep our exposure to this market at zero. We concede, though, that previous spikes in Japanese yields have come to nothing and again warn that much still needs to happen by way of fiscal and general economic reform before there can be talk of a normal market in Japanese bonds once more.

For the first time in the memory of the management of this fund, weather had a major impact on G7 bond markets. At the end of August, it hit New Orleans and US Treasuries with unprecedented force. US Treasuries have since recovered to normalcy. All the strength of the US bond market of August reversed out in September, as the realisation set in that the impact of the hurricane will be (a) not necessarily recessionary, and (b) quite possibly muted in the overall macro picture.

Japanese bonds were caught in an ill wind of a different sort. With a new government in place with a strong reform mandate, chances are that we will finally see a return to positive inflation, coupled with sustainable growth. That would be good news for equities, but bad news for bonds.

Our view is that the spike in yen yields is largely unrelated to the general upward drift in US yields, but more a reflection of changing domestic fundamentals within Japan. More weakness is expected here over the coming months, unless the reform process aborts again.

European yields were more stable than most, and outperformed Japanese and US yields in September. Our view is that this was also justified by the weak economic outlook for Europe, and is reflective of the expected trend for the rest of the year.

August started off where July had ended, with yields rising across the globe. US 10-year yields drifted above 4.40%. This was good news (briefly) for those low on duration, but the market changed tack abruptly. Yields dropped sharply for the last three weeks of the month.

In the first instance, there was growing conviction that the US Fed would continue hiking interest rates, and that this would cause the US yield curve to invert before the end of the year. Economic data continues to suggest that this is a possibility, and our view is that the curve will indeed invert, but perhaps not as early as this year. Towards the end of the month, however, the rally in yields became far more pronounced at the shorter end of the curve. In part, this was due to (in our view premature) the market's perception that Hurricane Katrina's aftermath is going to require monetary stimulus in the form of easier interest rates.

Credit spreads remained stable on aggregate, although in some sectors there was some strain, as the spread market simply could not keep pace with government bonds. Default rates among corporate issuers remain at cyclical lows.

In unhedged US dollar terms, the global market, as measured by the JP Morgan Global Bond Index, lost about 1% in July. We have made mention before of the market's apparent inability to price in a consistent inflation scenario for particularly the USA. During July, there was once again something of an about-face. The latest movement suggests that the market is now much happier accepting that the US economy is performing well, and will continue to do so. The inflation-linked bond market was the clearest indication of this latest change of heart, as the implied breakeven rate of inflation began increasing in the middle of July. It has been on a steady rising trend since then.

European yields also drifted higher, and in our view still represent better value than US paper. The European economy is showing some timid signs of life, but nothing near as menacing for shorter-term inflation prospects as in the USA. Credit markets seem to have fully digested the bad news that seemed to dominate the early part of the Northern summer, and has now settled back into a languid phase of sideways spread movements, at what we generally feel are demanding levels from a valuation point of view. We thus continue to prefer higher rated bonds, with US duration shorter than European.

June was one dominated more by currency moves than bond market moves. Even so, bond yields in the USA and Europe were lower for the better part of the month, continuing the trend established in April and May. In fact, European yields reached the lowest levels for many decades. On the face of it, the market has given up on European growth and is starting to lose faith in the robustness of US growth as well. We largely concur with the implied assessment on Europe, but remain more optimistic about the US in the short to medium term.

On currencies, the dollar staged a strong fight back, after spending the first few months of the year testing new low levels. The fund should be a beneficiary of such a move, seeing that it does not carry any yen exposure.

May started with a correction in US 10-year yields, in what looked like an overdue move higher in yields to levels closer to fair value. This was short-lived. The last three weeks of the month saw a vicious heave lower in yields, as the market became depressed about the prospects of growth. A good indicator of inflation expectations, the breakeven rate on TIPS (Treasury Inflation Protected Securities), fell be nearly 40-basis points over the same period. European yields also fared well in the month, but struggled to keep pace with the hot Treasury market. The Japanese market hardly budged by comparison.

Our view of these developments is that the market is being too hasty in writing off the global economy in the near term, although we have to concede that there are risks for the longer term. Disinflation may be the longer-term theme to keep an eye on. The lack of progress in the Japanese market may be a warning not to get too gloomy about things, too soon. Also, we continue to see more downside to growth in Europe relative to the rest of the economically active world. Particularly worrying is the weakness in core Europe: Germany, France and Italy. The dollar's return to favour is thus not entirely surprising. For the moment, we prefer our duration positions to be in Europe rather than anywhere else, and are careful of straying too far from the dollar.

Global bond yields, especially those of the U.S. government, rose sharply in March. A surge in oil prices, coupled with increased confidence in the global economic outlook, helped to convince investors that bond yields had reached unsustainably low levels. The selling was not universally as savage as in US markets. Japanese and European bonds were subject to some selling, but did not perform nearly as poorly as their US counterparts in total return terms. Driving the divergence, in our opinion, was the market's accurate assessment that things look a lot less encouraging from a growth point of view in these two areas.

Credit and emerging markets had a fairly poor month as well. In credit, things unravelled somewhat on the back of a surprising profit warning by General Motors, while emerging debt had a profit-taking spell after a very firm start to the year.

Global bond yields, especially those of the U.S. government, rose sharply in March. A surge in oil prices, coupled with increased confidence in the global economic outlook, helped to convince investors that bond yields had reached unsustainably low levels. The selling was not universally as savage as in US markets. Japanese and European bonds were subject to some selling, but did not perform nearly as poorly as their US counterparts in total return terms. Driving the divergence, in our opinion, was the market's accurate assessment that things look a lot less encouraging from a growth point of view in these two areas.

Credit and emerging markets had a fairly poor month as well. In credit, things unravelled somewhat on the back of a surprising profit warning by General Motors, while emerging debt had a profit-taking spell after a very firm start to the year.