The Income Fund returned +0.60% in June, slightly behind its benchmark which rose +0.61%. This was primarily driven by a decrease in interest rates, both in New Zealand and offshore, as well as the contribution from high initial yields in the portfolio.

Macroeconomic releases continued to be a focus for fixed interest investors this month with June showing a continuation of weak indicators, particularly in New Zealand. Mid-month saw food prices and business activity both pointing to a slowing economy.

June also saw a GDP release for the quarter ending 31 March. At just 0.3% the GDP result was positive, but not strong. Per capita figures show a much weaker picture, 4% below their peak. This is a strong indicator that high interest rates, set by the RBNZ, are having their desired effect. We think rate cuts are likely to begin this year, which should help short term fixed interest returns, at the cost of future income (from lower interest rates).

June’s highlights were numerous as most bonds rallied higher on lower interest rates. The best performers were Charter Communications and Westpac bonds which have maturity dates of 2032 and 2034 respectively. The increased duration until their maturity amplified the positive impact from falling interest rates, taking total returns for those bonds to roughly 2% for the month.

A detractor for June was Synlait which saw a slight negative return as the market digested further news regarding a potential solution to their ongoing profitability issues. Positively, their largest shareholder Bright Dairy has made a commitment to supply a loan to repay bank lenders. They have also provided a pathway to a shareholder recapitalisation which would inject fresh cash into the business to right-size their balance sheet and reduce debt. We think this is a prudent move for Synlait and look forward to more progress on these efforts in the coming weeks and months.