Fund review
The size of the Fund decreased from R1.6bn to R1.5bn during the first quarter of the year. The modified duration of the portfolio was paired back to 2.2 years from 2.5 years after bond yields had declined substantially. The Fund’s exposure to property was increased from 8% to 16%, after the selloff seen in the sector as a result of questions around some of the counters in the sector. The short term returns in the portfolio were affected by the volatility seen in the property sector.

Looking Ahead
The bond markets continued on its recovery path which started in December post the elective conference of the ruling party, which saw the currency strengthening as the new leadership is seen as market friendly. The All Bond Index returned 8.06% during the quarter, taking the 12 month return to print 16.23%. The 10 year maturity bond yield opened the quarter at 8.59% and ended the quarter at 7.98%. The variation of returns in the All Bond Index was largely explained by the performance of the long end of the yield curve with the 12+ sector, which is 60% of the index, returning 10.03% in response to an aggressive flattening of the yield curve. The quarter’s performance was driven by a lot of positive sentiment on South Africa specific issues, which saw foreign investors in the bond market continue to increase their holdings by R18 billion over the quarter. The decline in yield occurred despite a selloff in US treasuries which came as a result of a strong economy and wage inflation showing signs of increasing, which led to the Fed increasing short term interest rates by 25 basis points. The disconnect with the US treasuries is a clear reflection of how intense the effect of the euphoric sentiment had on South African markets. The credit default swap spread for the country also declined and touched a low of 140 basis points before tracking back to 160 basis points which is where it started the quarter. Further adding to positives, the budget statement in February was positive for the market as national treasury revised the debt trajectory to be much lower than what was forecast in the medium term budget statement. The revisions led to rating agency Moody’s not downgrading the country to below investment grade, which would have led to the country’s local currency debt being kicked out of the WGBI (World Government Bond Index). Instead, they changed the outlook from negative to stable, which now buys the country more time to turn the economy around due to the positive credibility the new leaders have.

The South African Reserve bank cut interest rates by 25 basis points at the March MPC meeting taking the repo rate to 6.5% in response to a benign inflation environment which saw inflation printing 4.0%, a number last seen in the first quarter of 2015.