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A New Zealand listed bond has suspended its interest payments to investors for the second time in a year after being hit by more fallout from the US financial crisis.
The Fidelity Capital Guaranteed Bond yesterday said it would not make its payment due on January 15 after a significant drop in value of the fund because of high volatility in the yield on US Government bonds.
Fidelity also suspended the interest payments in January this year but was able to make up the unpaid interest in its July payment.
The 6.3-year bond listed in April last year with $75 million invested. Investors' capital is guaranteed by Westpac bank but the interest has no such guarantee.
Fidelity said the fund's net asset value had dropped to $63 million on Tuesday as a result of yields on 10 year US Government bonds falling to 2.72 per cent, the lowest level they have been at since 1955.
Yields on US Government bonds have fallen as investors have rushed to invest in them because of their low risk relative to other investments.
The fund, which is managed by Tyndall Investment Management, takes options over the US Treasury bonds.
Fidelity said the drop in the value of the portfolio meant it would not have enough money put aside for the $19.5 million needed to support the capital guarantee and pay out interest to investors.
Fidelity chief executive Milton Jennings described the suspension as disappointing.
"We had been in great shape but the last two weeks has been the biggest drop in bond rates ever seen."
Jennings said the fund had been up as high as $84 million before the recent run. "The premiums that can be earned at the moment can be very high. You just don't expect rates to move 1 per cent in a week."
Jennings said the next two weeks would be critical as to whether the fund was able to recover some of its losses in time to make up enough money to pay the missed interest in July.
"If interest rates come back it's pretty good. If they continue to fall the guarantee will come in, less investments will be made and the money will be put into zero interest bonds." The interest rate set on the bond is 9.25 per cent which is supposed to be paid twice a year.
