DEX Universe Bond index yielding over 9%

[protomok]

Hi all,

I've been reviewing the DEX Universe Bond Index yields and noticed that the 1 year yield is 9.56%! Even the 5 year return is pretty high - 6.9%. I'm interested in putting some money in Manulife's Canadian Bond Index Fund (which tracks the DEX Universe Bond Index, 100% weighting) but I don't understand how this bond yield can be so high. Manulife's fund has 44% in Canadian Federal Bonds, 28% in Provincial bonds, and some corporate, municipal bonds.

I'm guessing the fund is taking advantage of the recent drop in interest rates over the past few years by selling high yielding bonds above purchase prices? Or is there a different reason for such a high yield?

Thanks!

Mark

[andrewf]

Return is different from yield. Most of the return on bonds lately has been due to rising prices/falling yields. As always, past performance is not a predictor of future results. Yields can't fall below zero (in most cases), so prices can't rise forever.

[sharbit]

I'm guessing the fund is taking advantage of the recent drop in interest rates over the past few years by selling high yielding bonds above purchase prices? Or is there a different reason for such a high yield?

You have the right idea. Their not really making that return off the interest but their holding them and their appreciating like mad. As rates go lower and lower bond prices become more sensitive to interest rate changes. Especially ones with longer maturity. So you'll likely need a strong stomach to hold these because the changes in price will probably be quite violent. If you want to read more, google bond convexity.

[protomok]

OK, thanks for the information, much appreciated!

I think I'll pick up some kind of mutual fund or ETF that tracks the DEX Universe and hold it for the short term. I read that the Fed has committed to keeping low until 2014 (*) assuming Canada also keeps rates low I think the DEX Universe should be a good investment for the next couple years. I was originally thinking of laddering corporate bonds, but buying a fund that tracks the DEX Universe seems like it will proivde a higher return, plus I can pull out as soon I think rates are going up. Hopefully this works out OK

* http://www.bloomberg.com/news/2012-0...late-2014.html

Mark

[Financial Cents]

XBB is great, it's an all-in-one bond product that tracks DEX Universe.