Bonds? who's buying? and what?
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Thread: Bonds? who's buying? and what?

  1. #1
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    Bonds? who's buying? and what?

    Anybody putting new money into bonds these days? And if so, what are you buying? Thanks.

    Last edited by jargey3000; 2017-05-14 at 01:49 PM.

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    I have not been able to easily replace our maturing bonds. BMOIL has very limited inventory of corporate bonds paying over 3% for 3-5, 5-7yr maturities. There are some high yield (high risk) bonds available, but not what I would buy. As a result, I have gone to convertible debentures and split preferreds with fixed maturity. While yields in 4-6% range appear attractive, but like corporate bonds, they include some equity risk,
    Last edited by agent99; 2017-05-14 at 08:45 PM.

  3. #3
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    I haven't bought anything new, but I continue to maintain my 25% allocation to bonds. I'm very happy with my purchases late last year and early this year, I think it was an excellent entry point -- the fear and scary news articles were a good indicator!

    Though I am buying individual bonds, my intention is to do the same thing as a bond fund. I don't second guess the yields, I just take what the market gives me and try to maintain a constant average maturity. Really it's very similar to what you do with a GIC ladder... both the bond fund and GIC ladder are excellent constructions.

    At the same time I was buying bonds aggressively, I helped my parents buy some ZDB. The total return is now +2.5%, hardly the bond carnage everyone assured me
    Last edited by james4beach; 2017-05-14 at 04:35 PM.

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    Quote Originally Posted by james4beach View Post
    At the same time I was buying bonds aggressively, I helped my parents buy some ZDB. The total return is now +2.5%, hardly the bond carnage everyone assured me
    I realize this refrain is all too common but I just don't understand the rationale for bonds. If I want income and/or something to hedge against falling equity rates why wouldn't I just use a high-interest savings account? Equitable Bank pays 2.3%. Why is a 2.5% bond yield better than this when I can withdraw the former at any time with no risk of losing money?

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    Quote Originally Posted by GalacticPineapple View Post
    I realize this refrain is all too common but I just don't understand the rationale for bonds. If I want income and/or something to hedge against falling equity rates why wouldn't I just use a high-interest savings account? Equitable Bank pays 2.3%. Why is a 2.5% bond yield better than this when I can withdraw the former at any time with no risk of losing money?

    Because Equitable could stop paying your 2.3% tomorrow and decide to pay you 0.75%. This is not the case with a bond.

    ltr

  7. #6
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    A bond fund will provide a better long term return than keeping cash in savings accounts. This will especially be the case if interest rates slowly creep upwards.

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    Quote Originally Posted by like_to_retire View Post
    Because Equitable could stop paying your 2.3% tomorrow and decide to pay you 0.75%. This is not the case with a bond.

    ltr
    By the same logic a bond fund could drop in value while the savings enthusiast could shift funds around to the highest bidder with zero chance for a loss.

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    Quote Originally Posted by GalacticPineapple View Post
    By the same logic a bond fund could drop in value while the savings enthusiast could shift funds around to the highest bidder with zero chance for a loss.
    You're confusing the purpose of a cash allocation that must provide 3 to 6 months of liquid expenses regardless of its return. Yes, you may be able to substitute cash for fixed income allocations by playing the highest bidder game, but that requires a bet on interest rates. No one knows where interest rates are going. You're right, there's no chance of capital loss over the long term between cash and bonds. The difference in total return is another story.

    ltr

  10. #9
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    Quote Originally Posted by GalacticPineapple View Post
    By the same logic a bond fund could drop in value while the savings enthusiast could shift funds around to the highest bidder with zero chance for a loss.
    If interest rates rise, so should those paid by HISAs and GICs. And as you say, your capital is then secure. With a bond fund, if interest rates increase, value of bond fund units WILL drop so that their yield remains competitive. In time this may correct, but in short term your bond fund units will lose value, likely wiping out any interest paid. Personally, I learned early on to stay well away from bond funds.

    Having said that, it is not easy to find a HISA paying 2.3% except perhaps during promotion. If your money is held in an online brokerage, HISAs pay much less. GICs may be 2% but then locked in for 5 years.

  11. #10
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    Think of the yield curve. Cash pays you rates tied to the short end (maturity=0) of the curve. Bond funds provide returns tied to the long end (maturity=10 usually) of the curve. Right now, the yield curve is pretty flat. The cash rate is 0.5%, 5 years is 1.0%, 10 years is 1.4%. These are conditions under which high interest savings account seem like they make more sense than bond funds or GICs. This is not universally true though... it depends on the yield curve, credit spreads, and absolute levels.

    If you want to keep pivoting your strategy based on the yield curve and spread to treasuries, that might be doable -- this is probably what successful active managers in fixed income can do. I doubt that most of us can successfully do this long term. For an example, see "MINT" which does shift its average maturity and composition, based on what their managers see as the best deals in fixed income.

    Again... I don't think I can time the bond market, time interest rates, or forecast the yield curve. Therefore I expect that a bond fund will provide superior returns to cash over the long term, simply because the yield curve rewards you with higher returns when you go to longer maturities.

    Last edited by james4beach; 2017-05-18 at 05:07 PM.

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