OneAnswer KiwiSaver Scheme International Fixed Interest Fund

Global bond markets ended the quarter lower, largely driven by inflation concerns stemming from the war in the Middle East, while the surge in Japanese bond yields early in the quarter also put pressure on global bond markets. When bond yields rise, bond prices fall.

After the US-Israel strikes on Iran and key infrastructure in the Middle East, oil and other commodities shot higher, which led to concerns of a reacceleration of inflation – a scenario where bonds tend to underperform. In response to this, central banks began to echo the concerns around inflation. The US Federal Reserve (the Fed) left interest rates unchanged, highlighting the difficult trade‑off between a slowing labour market, which would normally argue for rate cuts, and persistent inflation pressures, which justify tighter policy.

The Reserve Bank of Australia (RBA) raised its policy rate by 25 basis points to 4.10%, citing a “material risk” that inflation could remain above target for longer, partly reflecting rising fuel costs. Meanwhile, in Europe, both the Bank of England (BoE) and the European Central Bank (ECB) kept interest rates on hold. The ECB lifted its short‑term inflation expectations, while the BoE warned that an inflation shock could push inflation to 3.5%.

Over the quarter, the yield on the US 10-year government bond rose 15 basis points to 4.32%. Meanwhile, equivalents in the UK and Australia rose to their highest levels in more than a decade.

The fund invests in three different fixed interest strategies, managed by Northern Trust and PIMCO. Using multiple managers and approaches helps spread risk and provides exposure to a wide range of bond markets around the world. Over the quarter, fixed interest markets were weak overall, and all three strategies posted negative returns, broadly in line with global bond markets.

The strongest performer was the government bond strategy, which focuses on high‑quality sovereign bonds. These held up relatively better as investors became more cautious amid rising geopolitical tensions, although government bond prices still fell overall, particularly in Japan and the UK.

The PIMCO-managed global bond strategy was the weakest, as rising inflation concerns and market uncertainty hurt longer‑dated bonds and credit markets. The international credit strategy performed in between the two, with its diversified mix of corporate bonds helping to limit losses.