The income fund returned 0.27% in October as solid gains in New Zealand bonds were offset by mixed returns offshore. Locally, future short-term interest rate expectations finally began to ease as signs of a cooling New Zealand economy saw investors begin to again price in cuts to the Official Cash Rate in 2024.

Offshore, US and Australian long-term interest rates hit record peaks, with the US 10-year reaching heights not seen since 2007. In contrast, European and UK rates dipped, with two to five-year maturities benefiting the most due to growing economic worries in those regions.

Individual country economic data releases have different lags and timing, with a mix of positive and negative datapoints. As such we are not surprised by this ‘seesawing’ of interest rates as markets try and grapple with their implications.

Notable highlights for the fund this month were Netflix where third-quarter results showed a significant jump in subscriber numbers and improved cash flow, bolstering the company’s financial health. The company continues to grow profitability without growing debt levels, driving credit quality higher at pace. We see future credit ratings upgrades for the issuer in the near term.

Bank bonds such as those issued by Caixa Bank, Intesa San Paolo and UBS also did well as their credit spreads narrowed after positive results. Bank profitability continues to grow, and although we are wary of upcoming impacts from potential bad debts, banks are extremely well positioned having worked hard to bolster balance sheets for many years.

Laggards for the month included holdings in US dollar-denominated bonds, especially for companies with longer maturities like Charter Communications and Microsoft, who didn't do as well. Even though these companies had good third-quarter results, the negative impact of the rising US interest rates was stronger and pushed their bond prices down.

The fund's performance this month highlights the importance that higher initial yields can have on performance as positive absolute returns were achieved despite some headwinds from rising offshore yields.