OneAnswer KiwiSaver Scheme International Fixed Interest Fund

• In the US, bond markets faced headwinds against the backdrop of ongoing resilience in the local economy, which saw growth data come in stronger than expected and further job gains to start the year. Signs that certain sectors were still experiencing bouts of inflation also kept bonds under pressure. Despite this, the US Federal Reserve (the Fed) stuck with its projection of three interest rate cuts by the end of 2024, when it released its economic projections in March. Over the quarter, the yield on the US 10-year government bond rose 32 basis points, closing at 4.2%.
• European bonds were also lower, despite several of its economies showing better progress on inflation, raising the likelihood that the European Central Bank could begin cutting interest rates as soon as June. One outlier was Switzerland, where its central bank cut interest rates, saying it was comfortable that inflation there would revert to target levels, while adding it believed its actions would help boost economic activity.
  
• Meanwhile, Australian bonds outperformed most of their global counterparts, with the rate of inflation falling by more than expected. The market interpreted this as meaning the central bank had finished with its rate hiking cycle – a good scenario for bond prices.
  
• Performance of the fund was hindered by its overweight positions to US and UK bonds through its GDP-weighed strategy.
  
• US bonds spent most of the quarter on the backfoot amid a period of stronger economic data, raising concerns that interest rate cuts may come later than the market had been pricing in. Inflation data was the main driver, coming in hotter than expected, while the employment market showed little signs of easing with the economy continuing to add jobs each month at a good clip.
  
• Meanwhile, UK bonds had a particularly challenging start to the year as investors began to rethink the timing of Bank of England interest rates cuts. It came after a re-acceleration of inflation in January and comments from the central bank’s chief economic who warned that rates cuts were “some way off”.
  
• Despite the challenging quarter for fixed interest markets, the market is anticipating that most major central banks have finished raising interest rates and rate cuts could come as soon as the middle of the year. We remain constructive on the near-term outlook for fixed interest assets as the global economy is showing signs of slowing. Furthermore, if credit conditions tighten and a recession ensues, high-quality bonds should provide good returns.
  

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

• Fixed interest assets issued by governments or international companies
• Cash and cash equivalents.

This chart shows 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.