Fund Review
The Fund increased in size from R1.79 billion to R2.37 billion as demand for higher yielding portfolios up the yield curve increased. The Fund's modified duration was reduced to 1.3 years from 1.5 years. Inflows were used to purchase higher yielding assets, with a preference for floating rate instruments given that interest rates are closer to the bottom of the cycle. Purchases included Investec, African Bank, SAB Miller, Vukile Properties and various securitisation notes. The exposure to listed property was reduced in the quarter, with the Fund taking a more neutral stance on property allocation. There is a small exposure in preference shares.

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.