The Stanlib Extra Income Fund’s size decreased from R6.4 billion to end the first quarter of 2016 at R6.2 billion. The Fund’s modified duration was unchanged at 0.11 years as the holding of floating rate notes was unchanged. Holding of floating rate notes has benefited the Fund when the SARB increased interest rates. The current yield of the Fund is higher than that of a money market fund despite the defensive positioning, due to exposure in floating rate instruments that sit higher on the yield curve.

Looking Ahead

The bond market kicked off the year with a very volatile tone, tracking the local currency movements which were marred by a global risk-off environment and local political developments. The risk-off environment was created by developments in China, where the equity markets plummeted, which negatively affected emerging market assets.

The All Bond Index, however, returned an impressive 6.55% for the quarter driven by solid returns of 4.57% in January. The South African 10 year bond opened the quarter and year at 9.76%, traded firmer for most of the quarter to close at 9.10%. The firm performance was largely due to the bond market following the currency stronger, due to improved global risk appetite and decisive action from the South African Reserve Bank and the National Treasury, which was well received by the markets. The rand was volatile, opening the year at R15.50 to the US dollar, weakening to an intra quarter closing low of R16.92 in January and recovering to close the quarter at R14.76 to the US dollar.

The South African Reserve Bank responded to this currency weakness and worsening inflation outlook by increasing the repo rate by a total of 75 basis points at their first two meetings of the year. March CPI printed above expectations at 7.0%, largely due to food inflation caused by the drought the country is experiencing. The Finance Minister tabled the 2016/2017 National Budget in February, which highlighted the need for fiscal discipline while also acknowledging that the private sector needs to play a greater role in the economy and work with the Government to avoid any further credit rating downgrades. Overall it was a positive budget for bonds and sovereign ratings, with foreign investors and international credit rating agencies welcoming the Finance Minister’s intention to reduce fiscal deficit and contain government debt. We saw positive net investments of R16.6 billion by foreign investors into the bond market during the first quarter of 2016.

In international markets, the European Central Bank announced new measures to stimulate growth and inflation in the region. They cut interest rates, which pushed their deposit rate further into negative territory, and extended their quantitative easing program by EUR20bn to EUR80bn per month. The US Fed kept r

Fund review

The Stanlib Extra Income Fund size decreased from R6.6 billion to end the fourth quarter of 2015 at R6.4 billion. The Fund's modified duration was unchanged at 0.11 years as the holding of floating rate notes was unchanged. Holding of floating rate notes has benefited the Fund when the SARB increased interest rates. The current yield of the Fund is higher than that of a money market fund despite the defensive positioning.

Looking Ahead

The bond market had a torrid fourth quarter with the All Bond Index returning -6.4% which was the worst quarter in a long time. This brought the 12 month return into negative territory, ending the year at -3.9%, which was worse than what the market had initially expected. The dip into negative territory on the effective annual return was largely realised in the month of December where the ALBI was down -6.7%, following the unexpected removal of the minister of finance by the president. The South African 10 year bond opened the quarter at 8.44%, quickly raced to a high of 10.63% before settling back to end the year at 9.76%.

During the fourth quarter, the Rand experienced large volatilities as risks in emerging market increased, but also due to South African specific events. The unit printed an all-time low of R16.00 before recovering to end the year at 15.48. S&P rating agency surprised the market by downgrading the rating outlook from stable to negative, increasing the probability of the country being downgraded to sub investment grade. The Medium Term Budget Statement showed further fiscal slippage as debt-to-GDP ratios increased. For the year the currency lost 34% of its value against the US dollar which could be inflationary in future. During the quarter the SARB increased the Repo rate by 25 basis points. The South African 5 year credit default swap (CDS) spread widened substantially to a high of 360 basis points as a result of the December volatility.

In the international markets, the US finally increased the Fed Funds rate by 0.25% for the first time in almost a decade as economic data improved. The move was fully discounted by the market and as a result did not lead the market to break out of its current short term range. US 10 year treasury notes averaged 2.2% during the quarter. Emerging markets had a mixed quarter, with the spread opening at 446 basis points following the downgrade of Brazil to junk status, touched a low of 375 basis point before ending the quarter at 410 basis points.

The outlook for inflation has deteriorated as a result of the weak currency and the drought that the country is experiencing. As a result, the SARB will probably increase the Repo rate to contain inflation. The weakness in the bond market has created buying opportunities, but the market volatility still calls for prudency.