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22 December 2004 Angelo Coppola

Old Mutual reports that the US decoupled from most other global fixed income markets, by trending weaker during November.

* US bond yields rise while most other bond markets end stronger.

* Local market maintains its positive momentum and tests historical lows.

* Money market yield curve flattens.

This was mainly in reaction to data releases pointing to a more positive growth outlook, firm indications by several Federal Reserve Board members that further policy tightening was likely, and concerns that countries like Russia and China may reduce holdings of US-dollar denominated assets in reaction to continued US-dollar weakness.

In contrast, strong demand for assets offering a higher yield supported emerging market debt in general. For instance, the yield spread of the J.P. Morgan Emerging Market Index (EMBI+) over the US Treasury curve tightened by 36bps.

Participants in the local bond market ignored developments in the US, focusing instead on the possible positive implications of the rampant currency and lower crude oil prices on future inflation.

The benchmark R153 yield again decreased sharply - this time from 8.52% at the end of October to 8.27% at the end of November.

At the time of writing, the short end of the bond market has priced a significant probability of a 50bps repo rate reduction at the December Monetary Policy Committee meeting.

During the month under review, rates at the long end of the money market declined, while 3-month rates ended largely unchanged.

The flattening of the money market yield curve indicated that market participants are pricing the possibility of a December rate reduction.

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