OneAnswer KiwiSaver Scheme New Zealand Fixed Interest Fund

• New Zealand bonds had a volatile start to the year, eventually ending the quarter lower. Initial weakness in the local bond market was driven by strong domestic employment data, which showed the labour market remained significantly tight and that this was likely to underpin wage pressures. Inflation data also added to the challenges for the local market, as consumer prices rose at an annual pace of 4.7% in the fourth quarter of 2023. While it was the smallest annual rise in over two years, non-tradeable inflation (domestically generated) remained worryingly high, at 5.9%.
• These posed a particular challenge for the Reserve Bank of New Zealand (RBNZ), as it suggested the central bank may be inclined to leave interest rates higher for longer – or possibly even raise them – in order to get on top of inflationary pressures. This weighed negatively on the prices of bonds, which generally tend to do better when interest rates have peaked or are falling.
  
• Bond prices recovered somewhat during the second half of the period after the RBNZ delivered a relatively ‘dovish’ statement. The central bank left the Official Cash Rate (OCR) unchanged at 5.50%, with a key takeaway being that it sees the risks to inflation being ‘more balanced’. It also lowered its forward track – the rate it expects the OCR to peak – to 5.60%, implying a less-likely chance of further interest rate hikes.
  
• Meanwhile, perhaps the biggest news was confirmation the New Zealand economy entered a recession in the final quarter of 2023, contracting 0.1% over the three months ending December 2023, and marking the second consecutive quarter of negative economic growth. On a per capita basis, the economy fared even worse, shrinking 0.7% over the quarter. Markets took the news to suggest the next move by the RBNZ will be a cut.
  
• The fund continues to favour high-quality corporate bonds, which offer higher levels of income compared to government bonds, but do not compromise the fund’s focus on quality. This was of particular benefit given their outperformance over the quarter.
  

The fund invests mainly in New Zealand fixed interest assets. Investments may include:

• Fixed interest assets in New Zealand dollars, or issued by New Zealand located or incorporated entities and hedged back to New Zealand dollars
• Cash and cash equivalents.

This chart show the mix of assets that the fund generally intends to invest in – 100% fixed interest.

See the fund's actual investment mix on page 3 of the fund update.