Low yields.

[Snoopy]

As at 31st July 2023, we were told that the NZB fund had a yield of 5.59% and a duration of 3.31 years. The five year government bond rate is the closest match to the 3.31 year duration of NZB bonds. Five year government bond rates rose from 5.37% (07-08-2023) to 5.42% (10-08-2023) over the three days period of concern. (Source https://www.rbnz.govt.nz/statistics/...interest-rates). That kind of interest rate raise should reduce 5 year bond values on an annual basis to:

5.37/5.42= 0.9908

of what they were before the interest rate rise. However, the NZB fund had an average 3.31 year duration. So the reduction in value over the whole fund due to that interest rate rise I estimate as:

0.09908^3.31 = 0.9698

Leaving aside the question of bond sales for the moment, this is the 'capital hit' I would expect the NZB fund to take as a result of interest rate rises. But what was the capital reduction that actually took place over those three days?

2.86665/2.86732 = 0.9998 (the capital loss was lower than expected. I will discuss this result in a later post)

Why is my 'expected' diminution in unit price greater than what actually happened? There are several possibilities to help explain this.

a/ The NZB fund has in the past run a cash balance that might be used to repay smaller withdrawals, without the fund having to resort to selling any bonds.

b/ If bonds were sold, I do not know which bonds were sold. All I can do is base my calculation on the published 'average' yield. I had assumed that the bonds sold were at this 'average' yield. But the chances are the actual yield of the bonds sold were not sold at the average yield, as I had assumed. If the bonds that were sold had an above average yield, then this would impact the value of the remainder of the fund less.

c/ Bonds tend to be less liquid than shares. So the raising of interest rates may have taken a few days to flow through to changes in market prices for the underlying bonds. Thus many of the bonds on the 10th August 2023 may have been valued when interest rate expectations were lower.

d/ I based my 'interest rate rise expectations' on what happened to 5 year government bonds. But the average duration for bonds in the fund was 3.31 years.. If the rise of indicative interest rates in the 'nearer term maturity bonds' of the fund was less than my five year comparative marker, then that would flow through to a lower 'asset reduction factor' than I had calculated.

Thus the real reason(s) my calculation was not accurate could be one or more of the above four. Unfortunately the information in the public domain to make my calculations more accurate is not available. I nevertheless stand by my results from post 25, given the data I have access to.

SNOOPY