The Income Fund returned +0.6% in May, slightly ahead of its benchmark which returned +0.5%.

A focus for the month was the official cash rate review by the RBNZ. While the market had expected an unchanged rate of 2.25%, the focus was on the central bank’s outlook. There is a clear tension between weak growth and a still-elevated inflation outlook. As the Iranian conflict enters its third month, the impact of higher oil prices has begun to spread from petrol into input costs across other goods and services – such as food, freight and packaging. This is driving expectations of inflation over 4% for the second half of the year, which is roughly twice what the RBNZ targets. This has pushed market expectations for the OCR to around 3.35% by this time next year, as higher rates may be needed to offset inflation pressure.

Elsewhere, Polaris Forge bonds rallied 2.4% during the month, bolstering returns as the data centre developer announced a new 300 megawatt deal with a hyperscale client. Its track record of delivering critical IT space for AI workloads is gaining strength, leading credit markets to lower the spread required to compensate for lending to the company. In concrete terms, its credit spread tightened by about 0.3% during the month, driving bond returns higher.

OI Glass was another contributor in May, as the business prospects rebounded after a difficult March and April period. OI is a glass bottle manufacturer, so its manufacturing process requires an enormous amount of thermal energy. As the Iranian conflict escalated, the price of their key input (gas) increased. While the conflict continues, optimism around a ceasefire and the likelihood of lower input costs helped bonds to rally by 2.0%.

Auckland Airport bonds were a slight detractor in the month – falling 0.3%. This did not reflect any fundamental issues, but rather a slight increase in their credit spread from very low levels. As NZ’s largest airport continues their multi-billion-dollar infrastructure investment programme, we can expect to see more bonds issued, which could lead to further swings in credit spreads.