# Rates plummeting



## james4beach (Nov 15, 2012)

This concerns me... bond market yields (interest rates) have been plummeting this month and the movements are especially large after the recent Bank of Canada announcement.

The benchmark 10 year bond ended last year at 1.70% and today is 1.41%
The benchmark 5 year bond ended last year at 1.68% and today is 1.40%

Starting from already very low interest rates, these are pretty big declines this month. The entire Canadian bond market now yields less than the Bank of Canada overnight rate of 1.75%


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## agent99 (Sep 11, 2013)

Funnily enough, after making RRIF/TFSA transfers etc, I am in process of updating my overall portfolio spreadsheet and I noticed the same thing. Almost all of the 30+ corporate bonds we hold were up in value, (which of course means that anyone buying them now would receive lower interest rates). 

Haven't looked at GIC rates today, but seems to me that they had gradually been inching _upwards_ at BMOIL. From about 2.25 to 2.45% for 5yrs.


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## AltaRed (Jun 8, 2009)

2.19% (1 year) to 2.43% (5 year) at iTrade this morning. I think there will be a bit of downward pressure after dovish comments from Carney yesterday.


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## OptsyEagle (Nov 29, 2009)

What I thought was weird, was when the stock market was going up, all through January, the bond yields were also going down. Usually there is a bit of a non-correlation with stocks and bonds, although perhaps not as much as we would like.


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## james4beach (Nov 15, 2012)

AltaRed said:


> 2.19% (1 year) to 2.43% (5 year) at iTrade this morning. I think there will be a bit of downward pressure after dovish comments from Carney yesterday.


I strongly suggest buying the 5 year GICs as soon as you can, especially if you're in the market for A rated ones, which tend to track the government bond market more closely. I have a conundrum here as my ladder currently has fixed income maturing at 4.8 years, 4.9 years, 5.9 years .... seems I can't really buy another 5 year. (AltaRed what do you think?)


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## AltaRed (Jun 8, 2009)

I think a person should generally 'stay the course' and not try to second guess timing. Otherwise, you could run into well under 2% rates 5 years from now with a bunch of GICs maturing. Wasn't so long ago, 5 year rates were <2%


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## james4beach (Nov 15, 2012)

AltaRed said:


> I think a person should generally 'stay the course' and not try to second guess timing. Otherwise, you could run into well under 2% rates 5 years from now with a bunch of GICs maturing. Wasn't so long ago, 5 year rates were <2%


Good point, thanks for the reality check. You're right, if I pack these (4.8, 4.9, 5.0) there is going to be a ton maturing all at once.









Here's a picture of my current ladder. They aren't perfectly spaced, but I'm working on it. Thinking of adding a CMHC (Canada Housing Trust) bond right in the middle of that gap at 9 years.


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## AltaRed (Jun 8, 2009)

My 5 year ladder of GICs/bonds/debentures is not evenly spaced either. No real choice when buying bonds unless 'month' is more important than 'YTM' and it is not for me.


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## Just a Guy (Mar 27, 2012)

Yeah, I just got a mortgage for 2.8%. Not bad news at all


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## james4beach (Nov 15, 2012)

Just a Guy said:


> Yeah, I just got a mortgage for 2.8%. Not bad news at all


I'm funding that when I buy those CMHC bonds. Glad I could help.


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## agent99 (Sep 11, 2013)

james4beach said:


> (AltaRed what do you think?)


You didn't ask me, but really I wouldn't think it matters. Just pretend it is not part of your "ladder". If you buy something else with the money you are buying under today's market/economic conditions anyway. Whether it is a GIC or not, probably makes little difference. I have a bond/gic ladder, but don't worry about not having same amount in each rung.


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## james4beach (Nov 15, 2012)

agent99 said:


> You didn't ask me, but really I wouldn't think it matters. Just pretend it is not part of your "ladder". If you buy something else with the money you are buying under today's market/economic conditions anyway. Whether it is a GIC or not, probably makes little difference. I have a bond/gic ladder, but don't worry about not having same amount in each rung.


Thanks for the thought. I couldn't remember if you used a ladder yourself.


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## agent99 (Sep 11, 2013)

james4beach said:


> Thanks for the thought. I couldn't remember if you used a ladder yourself.


I do in RRIFs & TFSAs, and it is a bit out of whack. With bonds, it's not always possible to choose maturities you would like. In retirement no new money, so I am moving 2020 money into 2021/2/5 as bonds mature. Some GICs for short term, otherwise Corp bonds.

2020 ** 2021 ** 2022 ** 2023 ** 2024 ** 2025 ** 2026 ** 2027 ** 2028 ** 2029 ** 2030

23.91%,	11.42%,	14.10%,	18.52%,	25.37%,	2.15%,	0.00%,	2.15%,	0.00%,	2.37%,	0.00%

ADDED: I just updated ladder after recent buys/moves and 2021/2 look a little better. The later dates may have early calls, so that may explain why I am light in places. Ladder has 31 corporate bonds and 10 GICs. 


25% of our life's savings are in this ladder


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## Benting (Dec 21, 2016)

Well, 4% dividend blue chip equities looks good by the minutes.....


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## AltaRed (Jun 8, 2009)

Benting said:


> Well, 4% dividend blue chip equities looks good by the minutes.....


Of no value if capital protection is a fundamental tenent


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## Just a Guy (Mar 27, 2012)

AltaRed said:


> Of no value if capital protection is a fundamental tenent


I haven’t lost money on any of my stock investments, in fact, I’ve gotten all my invested money back just from the dividends, everything I hold is pure profit. How are those bonds doing in comparison?


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## AltaRed (Jun 8, 2009)

One has fixed income to have an assured Return OF Capital. Return ON Capital is for equities. I don't have much for FI but what I do have is a GIC and bond ladder. They actually hold their own and have always returned what they are supposed to do upon maturity. Not interested in those who don't understand the difference between fixed income and equities. It's a pretty fundamental concept.


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## Just a Guy (Mar 27, 2012)

Not interested in returns that, after taxes and inflation are basically zero or less


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## Tayls77 (Dec 10, 2019)

I just received notice from EQ that they increased their HISA to 2.45%


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## Just a Guy (Mar 27, 2012)

Wow, I make nearly 15% on the dividend from purchasing banks in 2007/8 plus the capital gains of over 300%


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## agent99 (Sep 11, 2013)

Just a Guy said:


> Not interested in returns that, after taxes and inflation are basically zero or less


At least that is something I can agree with. I think I have posted the same thing. Holding funds in GICs or government bonds at current rates in taxable accounts will provide a real return of zero or less. That is ROSOYC (Return OF Some Of Your Capital). That might suits some investors. Not me.

I just checked, and the before tax yield of my fixed income ladder is 3.49%. (Hard to do at present) It is all in registered accounts and is not drawn. It compounds there. Eventually, we may have to draw it and pay some taxes, but in the meantime it provides a safety cushion in the event equities tank or we need the funds for health or old-age care. 

I believe it makes a lot of sense for everyone to have part of their investments in fixed income. But for those who are 22 or 32 or at least a long way from retirement, probably no problem having higher allocation to equities.


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## james4beach (Nov 15, 2012)

agent99 said:


> I believe it makes a lot of sense for everyone to have part of their investments in fixed income. But for those who are 22 or 32 or at least a long way from retirement, probably no problem having higher allocation to equities.


Even younger people could need some % fixed income for stability.

What if they ever lose their jobs? Do you want to be stuck in say 80% equities during an economic downturn, and need to tap into your savings?

How about all those younger people working in Alberta's energy sector? I'll bet that those of them with higher fixed income weights had less stress during their industry's downturn. Much better to be able to comfortable withdraw from your investments when you need the money, instead of being "locked out" of your own money!

How about if they plan to buy a house? I'm in my 30s but want stability in my investments because I might buy a house (or invest more into my own business). Just because someone is younger doesn't mean it's a good idea for them to be in a very volatile, high equity allocation.


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## agent99 (Sep 11, 2013)

James, I did say a higher allocation to equities. Not 100%!

Realistically, most in 20s and early 30s would likely only have a savings account. Probably a car loan and if lucky, a home with a mortgage. Not much in savings possible at that stage. Any extra $$ used to pay back student & car loans.

If they have an interest in the markets, they may try buying a few stocks. I know we did in our mid 20s. We sold ours to come up with the 10% deposit on our first house. 

Your strong financial situation does not appear typical of others of similar age.


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## Just a Guy (Mar 27, 2012)

Every tenant I have ensures fixed income for a year. My companies provide me with fixed income, some as my dividends...it’s called true diversity, not owning a bunch of stocks or fixed income bank products.


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## james4beach (Nov 15, 2012)

I bought a 3 year GIC to fill my ladder a bit more completely. There are also some good promotional rates posted by Scotiabank (through the regular bank).

388 Day Special Rate GIC, 2.18%
18 Month Special Rate GIC, 2.22%
30 Month Special Rate GIC, 2.25%
*5 Year Special Rate GIC, 2.40%*

https://www.scotiabank.com/ca/en/personal/rates-prices/gic-rates.html

Bond yields continue to slide further today and I think the GIC rates are good, relatively speaking. For example you can get 2.40% on this 5 year GIC above, and the government 10 year bond is 1.36%


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## like_to_retire (Oct 9, 2016)

james4beach said:


> I bought a 3 year GIC to fill my ladder a bit more completely. There are also some good promotional rates posted by Scotiabank (through the regular bank).


To me, although no one likes a flat yield curve, it couldn't be a better time to create a 5 year GIC ladder. A once in a lifetime opportunity.

Usually, with a standard yield curve, when you first create a five year ladder you have to buy a 1, 2, 3, 4, 5 year GIC, and then suffer the poor lower term rates compared to the higher 5 year rate. So it basically takes at least 4 years until you're really running on all cylinders.

But today, the nice side effect of a flat yield curve is that you get a fully functioning 5 year ladder on day one.

ltr


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## latebuyer (Nov 15, 2015)

So is now a bad time to buy bonds? I made a gic ladder before christmas and planned to buy more vab to have some of each.


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## like_to_retire (Oct 9, 2016)

latebuyer said:


> So is now a bad time to buy bonds? I made a gic ladder before christmas and planned to buy more vab to have some of each.


There is no bad time really because you can't predict interest rate direction. 

If you have a GIC ladder that has a 5 year maturity along with VAB that has a maturity of around 10 years, that seems smart. 

Interest rates appear historically low, but could go lower, or not. I think your 10 year term is far enough at this time.

ltr


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## AltaRed (Jun 8, 2009)

The VAB chart has gone off the Richter scale this month with collapsing bond yields. I'd look at the 3 year chart to see if you want to buy right now. But as LTR said, there is no way to predict interest rates. They could go lower still.


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## james4beach (Nov 15, 2012)

VAB and XBB have gone ballistic. This is just nuts.

I've been gradually moving money into my bond/GIC portfolio over the last few weeks. One of the luckiest (smartest?) things I did was hedge this by buying a whack of XBB up front (inside TFSA). Now my XBB hedge is up nearly $600, which compensates me for buying the rest of my bonds at such high prices.

I wish rates weren't plummeting like this. Bad news for all fixed income investors.


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## james4beach (Nov 15, 2012)

like_to_retire said:


> To me, although no one likes a flat yield curve, it couldn't be a better time to create a 5 year GIC ladder. A once in a lifetime opportunity.


I will agree that for anyone managing a GIC ladder, this seems like a good time to fill it in (which is what I've been doing). If you have holes in your ladder, just about all GICs yield about the same now so you might as well plonk whatever you need into the ladder to fill it out.


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## agent99 (Sep 11, 2013)

like_to_retire said:


> But today, the nice side effect of a flat yield curve is that you get a fully functioning 5 year ladder on day one.
> 
> ltr


You are right. I suggested that to someone here just a few days ago. At BMOIL at that time, a 1 yr was 2.25% and a 5yr 2.44%. (I bought the 1yr, just to fill 2021 in my ladder. Not my style, but it wasn't much money. For 5 or 6 yr, I went with a corporate bond yielding over 3%.


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## james4beach (Nov 15, 2012)

Really good point. Someone could sit down and create a whole 5 year ladder in one shot right now.

Spacing the maturities out is important for long term management. This is what helps avoid timing interest rates.

The 0 - 5 year part of my ladder is nicely staggered now. But my FI portfolio's weighted average maturity is 6.8 years, too low. My target is 7.5 years so I will soon have to hold my nose and buy longer dated bonds to get my average back up. It doesn't "feel good" but is the right thing to do*. Luckily I have that XBB hedge in place and I will simply buy a 9 or 10 year bond and sell XBB to compensate.

_* right thing in my case (not saying it's right for others) since my FI policy is to maintain constant average maturity = 7.5 years_


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## off.by.10 (Mar 16, 2014)

james4beach said:


> VAB and XBB have gone ballistic. This is just nuts.


It's not that crazy. Look at the 5 year chart for XBB or VAB to get some perspective. It was just as high last summer, in 2016 and 2015.


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## AltaRed (Jun 8, 2009)

off.by.10 said:


> james4beach said:
> 
> 
> > VAB and XBB have gone ballistic. This is just nuts.
> ...


it is the rapid movement, meaning rate of change, that is different than previous rallies. Actual price movements are limited by the very nature of interest rate/duration interplay


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## james4beach (Nov 15, 2012)

^ Yes, the current movement is awfully rapid.



off.by.10 said:


> It's not that crazy. Look at the 5 year chart for XBB or VAB to get some perspective. It was just as high last summer, in 2016 and 2015.


But look at the total return, which is really what matters. The distributions of these bond funds cannot be excluded from the picture. Here's the total return chart: http://schrts.co/qnbjmtny

I agree that big picture, the return isn't outlandish, but it certainly is a new high. Here's the 5 year total cumulative return of a few things:

XBB 15.8%
XSB 7.6% (short term bonds)
PSA 7.4% (high interest cash)

Notice that while many people have been trying to stick to high interest savings and short term bonds, the total return of XBB actually blows away short term bonds & cash. Which is expected to be the case, because over long periods, XBB is almost sure to outperform cash (as long as the yield curve isn't inverted).

This is yet another year that has punished people who are hiding in HISA and short term bonds instead of going with regular bonds. Just look at that 5 year picture, or in fact, longer pictures like 10 years.

There was a time here at CMF, the last time XBB dropped lower, that on a weekly basis people were posting about avoiding bond funds and instead finding better opportunities in cash and short term bonds. People would say this is surely the better way to invest, since interest rates were going to go so much higher.


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## james4beach (Nov 15, 2012)

Here are longer term returns going back to the start of 2014 since that's around when PSA appeared. A little over 6 years, cumulative total returns, not annualized

PSA 8.9%
XSB 12.1%
XBB 28.7%

This is exactly what you would expect due to the yield curve. The farther out on the yield curve you go, the higher return you get in fixed income. PSA has very competitive cash interest rates and is doing as well as "cash" can do. But XSB (short term bonds) is still better, and XBB (average 10 year maturity) is significantly better.


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## hfp75 (Mar 15, 2018)

I think the markets are pricing in a 25 point drop for the next BoC - Monetary Policy Report.


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## james4beach (Nov 15, 2012)

The current inverted yield curve makes things difficult for investors. But one has to think about long term performance here. You are likely going to get higher performance in XBB or a 5 year GIC ladder _versus cash_, over the long term, because the bond market provides higher performance when you go farther out in time.

This is challenging for investors because it's hard to visualize this long term benefit with the ridiculous rates we see today.


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## off.by.10 (Mar 16, 2014)

james4beach said:


> ^ Yes, the current movement is awfully rapid.
> 
> But look at the total return, which is really what matters. The distributions of these bond funds cannot be excluded from the picture.


Of course. I look at the price chart as a quick way of seeing historical yield changes. Not sure if it's actually valid over a longer period of time but it should be locally.

Otherwise, the only difference between price change and distributions is how the money gets taxed. In fact, for everything else, I will almost never look at a chart which does not include distributions.


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## doctrine (Sep 30, 2011)

james4beach said:


> The current inverted yield curve makes things difficult for investors. But one has to think about long term performance here. You are likely going to get higher performance in XBB or a 5 year GIC ladder _versus cash_, over the long term, because the bond market provides higher performance when you go farther out in time.
> 
> This is challenging for investors because it's hard to visualize this long term benefit with the ridiculous rates we see today.


If some Cdn yields can go negative and longer term rates continue to drop, XBB will continue to outperform.


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## james4beach (Nov 15, 2012)

doctrine said:


> If some Cdn yields can go negative and longer term rates continue to drop, XBB will continue to outperform.


There are so many ways this can play out. The short end of our curve could go negative while the long end stays higher at say 1% or 2%. That would be a steep yield curve and also quite good for XBB going forward.

The bond market and interest rates in general are unpredictable. I used to try forecasting what would happen but now I just acknowledge that I have no clue.


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## OptsyEagle (Nov 29, 2009)

I know there are many countries in the European Union that have negative rates but in my opinion the only way that can really happen is with some form of government intervention or a temporary scare of some sort that corrects itself once the scary stuff is over. I don't know if they have quant. easing in Europe or not but I just can't see an educated person giving there money to these over indebted countries and paying them for the pleasure of doing so. I know I never would.

Personally, I am about at my limit with Canadian bond rates. Even if HISA rates go down also, closer to zero, my bond money will be there soon enough because although the reward would be peanuts, at least the risk is zero. Bonds don't have that trade off. You can lose a lot of money in bonds, at least temporarily as interest rates move back up.


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## agent99 (Sep 11, 2013)

This article in NYT is about 8 months old, but perhaps even more relevant now. It's interesting to read some of the comments (if you weed out the politics)

https://www.nytimes.com/2019/05/30/business/bond-yield-curve-recession.html

No answers though. 

OE says above that you can lose a lot of money in bonds. That is true on paper or if you sell them. Brings me back to:
- hold short enough term bonds with fixed maturity (even BBB & higher corporates). What is the likelihood of them defaulting? Based on previous recessions, probably low. 
- GICs in registered accounts probably OK, especially in TFSAs where there will never be a tax on the interest. 
- preferreds with short term fixed maturity (hard to find, but splits do)
- actual RRBs? Probably not practical for smaller investors?
- More stocks, less FI? Many may go this way. Don't worry about stock prices and rely on dividends being maintained through a recession. 

My plan is a mix of the above!


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## AltaRed (Jun 8, 2009)

As I understand it, negative rate bonds are not at the retail level. They are at the central bank-to-bank level.


> Negative-yielding debt is not new in Europe and Japan where these bonds are issued by European and Japanese governments. In Japan, the interest rate set by the government is below 0%. With a negative interest rate, the central bank charges banks for keeping deposits. This is a monetary policy that tries to encourage banks to lend out money and stimulate the economy. The same strategy has been used by the European Central Bank.


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## james4beach (Nov 15, 2012)

OptsyEagle said:


> Even if HISA rates go down also, closer to zero, my bond money will be there soon enough because although the reward would be peanuts, at least the risk is zero.





agent99 said:


> Brings me back to:
> - hold short enough term bonds with fixed maturity


This is the point I keep trying to make. These, above, are the same old reactions that everyone has... stick to cash or short term bonds. I have the same gut reaction too, but I have to fight my tendency to do that. This is an attempt to time the bond market and forecast interest rates & the yield curve.

These approaches (sticking to the short end of the curve) are likely going to _underperform_ a regular bond fund over time. Yes you do protect yourself from fixed income price volatility, but you lose performance in the long term.

Bond funds like VAB should outperform over the long term because they get the longer terms, and the yield curve *almost always* gives you higher performance at longer terms. Avoiding these bonds and sticking to short term bonds or cash is an attempt at market timing.

The problem is that eventually, when rates go up, you will miss out on better performance. VAB will start being able to roll over its bonds at juicier, higher yields. Same with the 5 year GIC ladder. Instantly... _passively_... you start getting the benefit of higher rates.

But you, in cash & short term bonds, will get the idea to again invest back into regular bonds after some delay and lost performance. It's simply too difficult to strategically trade around the bond market like this. You might get lucky and get your timing right once in a while but you generally cannot succeed at timing the market.

If you're saying that rates will remain near zero forever, then you are in fact making a strong speculative bet on the bond market. You might be right, but it's just one possibility. And yes, if rates remain near zero forever, I agree that cash offers better storage. _But this is only one possible future._

Just beware. The shorter maturity you go (including cash) the less return you can expect over time. This is more a question of strategy than the current day picture. The VAB strategy, and 5 year GIC strategy, is to simply keep rolling over everything at prevailing interest rates... usually this is the best strategy.


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## OptsyEagle (Nov 29, 2009)

You also have to keep in mind that there is a difference between a direct bond holder, building a ladder of some sort, and those who hold bonds through ETFs or funds. I am the latter so, I don't really call it market timing as much as I call it risk and reward analysis. I also have a GIC ladder which I have no intention of fiddling with. That is because, to do so would be market timing, and at least I don't have to look at the capital value dropping if rates go up. Added to that is the more important point, the GICs are guaranteed to return my money, whereas the ETF does not.


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## agent99 (Sep 11, 2013)

james4beach said:


> These approaches (sticking to the short end of the curve) are likely going to _underperform_ a regular bond fund over time. Yes you do protect yourself from fixed income price volatility, but you lose performance in the long term.


James, you are missing something here. The short term corporate bonds that I was talking about, are the same ones I have always bought. Usually 3-6 yr maturity and sometimes intermixed in ladder with GICs when they offer a better yield than they do now. Using overall plan outlined in post #44 above, I probably have a much lower chance of underperforming than you do with your usual ultra-conservative approach. You may notice that I did not mention bond ETFs (that was not by accident!)


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## james4beach (Nov 15, 2012)

True agent99 that there are some differences between what you and I do. I'm getting lower yields since I go for higher credit quality, and you are getting a bit extra performance due to lower credit (corp bonds)



OptsyEagle said:


> Added to that is the more important point, the GICs are guaranteed to return my money, whereas the ETF does not.


Well a single GIC isn't really any different from a single bond. Both are guaranteed to return money.

Now think of them in a portfolio. There isn't much difference between a GIC ladder and bond ETF. Both are ladders with fixed income instruments that have guaranteed values at maturity. Both continually reinvest the maturing amounts.

The only real difference between these is that the bonds have visible prices, and GICs don't. If you could see the GIC prices fluctuate you would see your GIC ladder's value fluctuate all over the place as well.

But my understanding of bond ETFs is that, if you hold it for the time length similar to the average maturity, that it's basically guaranteed to provide positive return. The holdings in the account are all guaranteed to have positive return. Over time, the whole fund is guaranteed to have positive return. I just don't think they are as risky as people seem to fear. You can't have something which contains a bunch of positive-returning securities and get a negative return.

For VAB or XBB, that means holding at least 10 years. If you're holding at least that long, the positive return is almost guaranteed.

In the short term, absolutely there can be volatility but this is just noise which distracts from the long term picture: bond ETFs provide guaranteed positive returns. And they adapt very well to changes in interest rates, probably better than most individual investors can pull off (due to passive strategy).


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## OptsyEagle (Nov 29, 2009)

james4beach said:


> Well a single GIC isn't really any different from a single bond. Both are guaranteed to return money.
> 
> Now think of them in a portfolio. There isn't much difference between a GIC ladder and bond ETF. Both are ladders with fixed income instruments that have guaranteed values at maturity. Both continually reinvest the maturing amounts.


A GIC and a bond of the same maturity is about the same. No argument there.

As for a bond ladder being the same as an ETF, I couldn't disagree more. Every part of an individually owned bond ladder is capital you employed that is guaranteed to be paid back in the amount you invested. You even know the day on each bond when it will be repaid. With an ETF, you simply have none of those assurances. This is not to say a bond ETF is an overly risky investment, but it is much more risky then individually owning all the same bonds. I just don't think the risk of an ETF is high enough to deal with the bother of owning them all individually. That is a personal decision, one where I at least understand the risks involved on both sides of that decision.

As for interest payments being reinvested. Keep in mind that interest payments are growth, not capital. It is the capital I am talking about here. As for the interest, both individual ownership of bonds and ETFs give no assurance as to the rate that those interest payments can be re-invested in the future.


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## james4beach (Nov 15, 2012)

OptsyEagle said:


> As for a bond ladder being the same as an ETF, I couldn't disagree more. Every part of an individually owned bond ladder is capital you employed that is guaranteed to be paid back in the amount you invested. You even know the day on each bond when it will be repaid.


What's inside a bond ETF is the same as the bond ladder you hold right? Everything the ETF holds is guaranteed to be paid back. You can look at their list of holdings, and it tells you exactly what day each will be repaid. I still don't see how they are different...

(admittedly yes there is uncertainty since the bond ETF is managed by someone else, so they could do any wacky old thing if they want, but I don't see any historical basis for this concern given that XBB has an extremely good track record through multiple managers)

My personal experience with this is that I hold a portfolio of individual bonds. My own bond ladder. I can see the daily price volatility and the thing acts exactly like XBB... same daily movements, same return. OK well I get a bit less volatility but that's only because my duration is a bit shorter. But running my own bond portfolio has really showed me what's going on under the hood of a bond ETF. *Mine acts exactly the same way.*

However, I will admit that XBB managers do a better job than I do. They don't suffer cash drag. They are diligent about rolling over and reinvesting and maintaining constant average maturity. I have been failing at all of those things... the bond funds do it better!

I would say there is an advantage from the ETF's professional management. If interest rates spike up to 8% in the coming years, will you be able to reinvest your maturing amounts into bonds that are crashing? Imagine the articles they will be running those days. We'll all be scared to buy plummeting bonds while interest rates soar.


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## like_to_retire (Oct 9, 2016)

james4beach said:


> What's inside a bond ETF is the same as the bond ladder you hold right?.


I think the ETF is quite a bit different in its management though, so they don't really equate to each other.

Certainly one of the things ETF's do (as you know) is riding down the yield curve, and this makes it quite different than someone's typical bond ladder. With the bond ladder, we hold to maturity and get our money back for each bond. Just not possible in an ETF, and their system of selling before maturity makes it a different animal I think. 

If there was a small constant increase in interest rates over twenty years, I don't think anyone that held an ETF would say it was the same as holding actual bonds in a ladder.

ltr


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## james4beach (Nov 15, 2012)

Yes, they do sell some bonds before maturity. There is no risk of loss on those sales; the bonds are sold within 1-2 years of maturity and they basically have cash yields at this point. Those bonds all show gains, practically the same return as if they matured.



like_to_retire said:


> If there was a small constant increase in interest rates over twenty years, I don't think anyone that held an ETF would say it was the same as holding actual bonds in a ladder.


Yeah, they'd probably say the bond ETF does better!

I think a steady increase in interest rates over the next 20 years would actually be great for bond ETFs. That's according to the behaviour that I've modeled out, anyway. What happens is that each maturing bond gets rolled or reinvested at really nice, higher yields. The performance of the fund continuously increases as the average yield steadily ticks higher.

In comparison, an owner of individual bonds would probably struggle to stick with the plan of maintaining constant maturity as they fear rising rates. They would miss the chance to reinvest into higher yields, or stumble around in shorter maturities.

Gradually and steadily rising rates are exactly what a bond ETF investor should be wishing for. I'm hoping for it!


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## AltaRed (Jun 8, 2009)

james4beach said:


> Gradually and steadily rising rates are exactly what a bond ETF investor should be wishing for. I'm hoping for it!


Any bond investor, ETF or not.


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## like_to_retire (Oct 9, 2016)

james4beach said:


> In comparison, an owner of individual bonds would probably struggle to stick with the plan of maintaining constant maturity as they fear rising rates. They would miss the chance to reinvest into higher yields, or stumble around in shorter maturities.


I think just the opposite. 

The bond holder would be pleased to see those higher rates and would get all his principle back at maturity on each rung of the ladder and then would joyously re-invest the rung.

The poor ETF holder would continually suffer from share price lag and would get so frustrated with it, they'd sell.

ltr


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## AltaRed (Jun 8, 2009)

There is price lag to be sure, but the bond ETF holder should already know that. There are a number of reasons for someone to be, and stay in, a bond ETF.


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## like_to_retire (Oct 9, 2016)

AltaRed said:


> There is price lag to be sure, but the bond ETF holder should already know that. There are a number of reasons for someone to be, and stay in, a bond ETF.


The guy that buys individual bonds likely has a clue what's going on, but a lot of the ETF holders are novices and get pissed when they see their share price dropping. "Hey, I thought bonds were safe, and now I'm losing money - I'm selling this crap and buying weed stocks".

ltr


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## agent99 (Sep 11, 2013)

like_to_retire said:


> The guy that buys individual bonds likely has a clue what's going on, but a lot of the ETF holders are novices and get pissed when they see their share price dropping. "Hey, I thought bonds were safe, and now I'm losing money - I'm selling this crap and buying weed stocks".
> 
> ltr


That is right. ETFs are susceptible to market sentiment. Just like stocks. 

If we are supposed to hold fixed income to safeguard us from a market crash, it might be worth thinking about how we would cash in our fixed income if we had to.


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## james4beach (Nov 15, 2012)

like_to_retire said:


> ... but a lot of the ETF holders are novices and get pissed when they see their share price dropping. "Hey, I thought bonds were safe, and now I'm losing money - I'm selling this crap and buying weed stocks".


You're right, many bond ETF holders will say that and sell (at the low). Maximum drawdown on XBB should theoretically be roughly 16% absolute worst case scenario. But I agree that many people will lose their minds if XBB falls that much. They will panic, and sell. Some won't even understand total returns and will panic that the "share price" has fallen more.

A more typical "bad decline" can be seen in the history of XBB and the RBC Bond Fund. Those declines were roughly ~ 10%. It can happen. So could 16%.

But yeah, if ~ 16% drawdown is way too much for someone, then shouldn't invest in VAB or XBB. If they are very sensitive to losses the GIC ladder is the way to go.



agent99 said:


> If we are supposed to hold fixed income to safeguard us from a market crash, it might be worth thinking about how we would cash in our fixed income if we had to.


That's a really good point and I agree. My solution is to have a well filled in GIC ladder, which I hold in addition to bonds. I always have a GIC maturing at least every 6 months so that's how I can "cash in" some fixed income.

The second way is by liquidating the shorter term bonds in my portfolio. My ladder is a mix of GICs + bonds. The bonds that are just a couple years from maturity are nearly as good as cash.


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## OptsyEagle (Nov 29, 2009)

james4beach said:


> What's inside a bond ETF is the same as the bond ladder you hold right? Everything the ETF holds is guaranteed to be paid back. You can look at their list of holdings, and it tells you exactly what day each will be repaid. I still don't see how they are different...
> 
> (admittedly yes there is uncertainty since the bond ETF is managed by someone else, so they could do any wacky old thing if they want, but I don't see any historical basis for this concern given that XBB has an extremely good track record through multiple managers)
> 
> ...


You are missing my main point. It's not that the makeup of the investments between individually owned ladder and an EFT are all that different. It is the ownership that makes the ladder safer. You can simply say enough, with the ladder and be guaranteed to get your money back. With the ETF, even if you knew when a bond came due, they do not sell it and give the money back to you. They reinvest it. You have no control. Others buying and selling make a difference as well. These are not huge risks but they are differences that need to be understood when determining the level of risk and what type of risk one is taking or protecting.

With an ETF there is absolutely no guarantee that you will get your money back. Rates could keep rising forever. That does not make a difference in the individually owned FI but it makes all the difference in the world when one owns an ETF.


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## agent99 (Sep 11, 2013)

Creating and maintaining a suitable bond ladder is not that easy. You have to rely on whatever bonds are offered by your brokerage. The offerings are sometimes limited. Some brokerages may have better selection than others. I don't distinguish between bonds and GICs in our ladder. So, if I can't find a suitable bond, I may slot a GIC in. Either way, I like the certainty of bonds with respect to capital and interest. 

On the other hand, bond ETFs are readily available. They are easy to buy and also easy to sell and fees are low. Initially likely aimed at the small or less sophisticated investor? Even now, I imagine that few owners of bond etfs look at or know anything about average maturity, duration, yield curves and the like. Under certain circumstances, the ETFs can drop significantly in value. Investors may see that and bail out. There goes the safety net.

Then there are bond mutual funds. Some with MERs that wipe out a good part of yield! I learned about these the hard way, back in the day 

To sum up - Yes, there is a place for ETFs, but buyers should try and understand them first.


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## james4beach (Nov 15, 2012)

Yeah, the ETFs are incredibly easy in comparison. I do run a bond+GIC ladder and it took me ~ 2 years to fill in the maturities. Lots of work and lots of ongoing management.

You know what really hurts? That whole time, XBB outperformed me because of how slowly I filled mine in. I missed the huge bond rally earlier last year and yet again, suffered cash drag. This kind of thing shows the benefit of the simpler passive approaches... if I had deployed the same money into the same exposure using XBB or ZDB instead, I would have been wealthier.

That isn't to say my self-run bond ladder isn't still the better idea, theoretically, but it to work out better I have to (a) stay disciplined, (b) keep managing it, (c) avoid cash drag

Aside: XBB is up a whopping 0.4% today (also went ex div so you need to include the distribution), ZDB up even crazier at 0.5% on the flight to safety


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## agent99 (Sep 11, 2013)

james4beach said:


> Aside: XBB is up a whopping 0.4% today (also went ex div so you need to include the distribution), ZDB up even crazier at 0.5% on the flight to safety


You better keep watching. Last time I looked, it was down 4c from opening price  Watching the price of a bond ETF ???????


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## james4beach (Nov 15, 2012)

agent99 said:


> You better keep watching. Last time I looked, it was down 4c from opening price  Watching the price of a bond ETF ???????


Yeah we really shouldn't watch this, but I need to point out that you missed the distribution. The share price dropped today due to the payment of 0.072 per share and this must be taken into account. Friday's close was 32.42 but once adjusted for the distribution, the last close was *32.348*

Current market price is 32.44 so XBB is up 0.28% today, total return.


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## james4beach (Nov 15, 2012)

I think there's a chance (due to the Wuhan virus) that interest rates may soon be headed back to 0%. There is a possibility of a significant economic slowdown and deflationary force due to this outbreak.

I see a possibility of Canadian rates approaching 0% which would mean good performance for XBB/VAB/ZAG and 5 year GICs purchased today. We have no idea what the future will bring.

Keeping money in cash or short term bonds while waiting for better bond/GIC yields (timing the bond market) might turn out to be a huge mistake. For all we know, 2020 and 2021 could be awesome years for XBB performance.


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## agent99 (Sep 11, 2013)

This is bad news for those buying GICs and low yield bonds:

https://www.cbc.ca/news/business/canada-inflation-january-1.5468187 (Reports inflation rate now 2.4%)

Basically means that GICs provide a NEGATIVE real return. In other words, no real Return On Capital or Return OF Capital. Even in TFSAs but of course worse in taxable accounts or RRSP/RRIFs. 

Today, I have been looking for a home for some cash that has built up in our accounts. I still am. 

I did invest $17000 in one account. Bought ~$11,000 LBS.PR.A and $6000 of a Ford Credit bond with 2yr maturity yielding 2.75%. 

Pickings are slim. 

I already probably have too much in split preferreds, but they seem to be one of the few investments that are relatively safe from a downturn in markets while still offering a substantial yield. Especially ones that hold quality equities.


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## james4beach (Nov 15, 2012)

You may think so agent99, but the bond market disagrees. The bond market doesn't show any concern about inflation.

Interest rates still plummeting, down significantly since that news release.


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## agent99 (Sep 11, 2013)

james4beach said:


> You may think so agent99, but the bond market disagrees. The bond market doesn't show any concern about inflation.
> 
> Interest rates still plummeting, down significantly since that news release.


James, 
It's not what I think, it's just actuality.
Bond markets have no say in what is happening right now. 
Real Yields on GICs and low yield bonds are negative today and are worse than negative if held in taxable accounts. 
If you buy a GIC today that yields 2%, you are accepting a negative real return. 
Your only hope is that inflation rate will go down. And that seems unlikely.


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## james4beach (Nov 15, 2012)

Bond yields have dropped dramatically in the last few days. The Canada 10 year bond now yields only 1.2%

A stunning collapse in interest rates since the new year.


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## james4beach (Nov 15, 2012)

Fed cut rates sharply today. Yields on everything continue to drop, I think towards inevitable zero. Bank of Canada announces tomorrow, probably also cutting rates.

In anticipation of all this I bought GICs on Monday. Not happy with these lower rates. It's bad monetary policy.


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## MrMatt (Dec 21, 2011)

james4beach said:


> Fed cut rates sharply today. Yields on everything continue to drop, I think towards inevitable zero. Bank of Canada announces tomorrow, probably also cutting rates.
> 
> In anticipation of all this I bought GICs on Monday. Not happy with these lower rates. It's bad monetary policy.


The lack of real leadership during this crisis is troubling.

That being said, I think it's important that the Bank of Canada, and other institutions, maintain their independence.

I think it's a risky trajectory, however I don't think that there are any good solutions. 

Hopefully they're taking responsible well considered and "not horribly damaging" actions.


Oh and the falling rates are great for your FI allocation.


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## james4beach (Nov 15, 2012)

MrMatt said:


> Oh and the falling rates are great for your FI allocation.


Yes my bond prices are doing well but personally I would prefer crashing bond prices so I could get higher yields. I was very happy through 2017 and 2018 when bonds were falling and it was possible to load up on fixed income providing nice yields for a long time.

I was hoping that interest rates would keep going higher even though, deep down, I knew that rates would get back to 0%.


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## agent99 (Sep 11, 2013)

james4beach said:


> Fed cut rates sharply today.


Seems cut was already priced into the market. Mondays DJ gains almost wiped out. 

I don't fully understand reason for cut, but it seems it has a lot to do with crashing global markets.


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> ... In anticipation of all this I bought GICs on Monday. Not happy with these lower rates. It's bad monetary policy.


I'm happy I topped up on GICs a while back.


Cheers


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## james4beach (Nov 15, 2012)

Rates have officially now plummeted in Canada with the Bank of Canada cutting by a whopping 50 basis points.

The Canadian 10 year bond now yields 0.94%

Bond funds like XBB are up dramatically on the news. Congratulations to everyone investing in GIC ladders and bond funds, and not trying to time interest rates by sitting in cash.

I have a 30 year bond that I bought in December at 1.6% yield. The yield on this today is something like 1.2% and my price increase is over 10%


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## agent99 (Sep 11, 2013)

james4beach said:


> Rates have officially now plummeted in Canada with the Bank of Canada cutting by a whopping 50 basis points.
> 
> The Canadian 10 year bond now yields 0.94%
> 
> ...


Unless you are going to sell them, why would a temporary increase in the price of bonds or bond funds be something to celebrate? 

If someone has a GIC ladder, they will continue to receive same yield as before. If their 5yr matures in near future, then they will have to renew for 5 years at low interest rates. Again, not something to get excited about. 

Everything is so volatile now. Why watch short term swings in interest rates? Anyone contemplating buying bonds funds should think about that. Are rates likely to go much lower. Not much room on down side.


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## AltaRed (Jun 8, 2009)

A drop to 0% nominal would have a very large effect on bond ETF pricing. Could bet on that this morning and maybe make 15-20% cap gain on XBB by the end of the summer. Bond managers do it for the cap gains while retail investors tend to do it for the yield.


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## MrMatt (Dec 21, 2011)

Any thoughts on trying to renew my mortgage now, vs waiting for December?
I have a vrm.


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## agent99 (Sep 11, 2013)

AltaRed said:


> A drop to 0% nominal would have a very large effect on bond ETF pricing. Could bet on that this morning and maybe make 15-20% cap gain on XBB by the end of the summer. Bond managers do it for the cap gains while retail investors tend to do it for the yield.


So speculate on bond etfs for possible capital gains? 

FI is supposed to provide a measure of safety. So seeing this is a high risk bet, where would the bond etf be in the portfolio? Surely not fixed income


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## james4beach (Nov 15, 2012)

agent99 said:


> Unless you are going to sell them, why would a temporary increase in the price of bonds or bond funds be something to celebrate?


The increase in the value of my bonds completely buffered the impact of stocks crashing in recent days.

Surely that's a benefit? And yes, I realize those are temporary price effects, but it helps reduce volatility of my portfolio.


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## agent99 (Sep 11, 2013)

james4beach said:


> And yes, I realize those are temporary price effects, but it helps reduce volatility of my portfolio.


You are looking at portfolio daily? I haven't looked, but I am sure our portfolio is up on FI side too. Almost everything we have yields over 3%. I just don't consider or even look at that.


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## james4beach (Nov 15, 2012)

agent99 said:


> You are looking at portfolio daily? I haven't looked, but I am sure our portfolio is up on FI side too. Almost everything we have yields over 3%. I just don't consider or even look at that.


Helps on much longer time spans too. Take 2011 for example. TSX down 9.2% and XBB up 9.4%. Would you not call that a benefit of holding the bond fund?

I think holding just a 5 year GIC ladder is also a perfectly good option but in that 2011 example, the GICs only gained ~ 3%. The volatility dampening effect was far more significant with XBB.

Both are valid approaches.


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## AltaRed (Jun 8, 2009)

agent99 said:


> AltaRed said:
> 
> 
> > A drop to 0% nominal would have a very large effect on bond ETF pricing. Could bet on that this morning and maybe make 15-20% cap gain on XBB by the end of the summer. Bond managers do it for the cap gains while retail investors tend to do it for the yield.
> ...


Not that I care too but that is what bond managers do and that is the classic premise of asset allocation and re-balancing methodology. Just as James articulated.


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## hfp75 (Mar 15, 2018)

MrMatt said:


> Any thoughts on trying to renew my mortgage now, vs waiting for December?
> I have a vrm.


I'd wait till summer and re-evaluate


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## agent99 (Sep 11, 2013)

james4beach said:


> Helps on much longer time spans too. Take 2011 for example. TSX down 9.2% and XBB up 9.4%. Would you not call that a benefit of holding the bond fund?
> 
> I think holding just a 5 year GIC ladder is also a perfectly good option but in that 2011 example, the GICs only gained ~ 3%. The volatility dampening effect was far more significant with XBB.
> 
> Both are valid approaches.


So is holding bonds with known maturity (and potentially higher yields) in a bond ladder. Corporates would have higher risk that GICs. But maybe not as much as speculating on interest rates with a bond ETF? 

1 year is not really long term. If you had had your 70/30 allocation in say XBB/XIU over say past 20 years, and rebalanced once a year, how would that have faired vs say, XIU alone? (I don't know and don't know a way to check that easily on-line.)


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## james4beach (Nov 15, 2012)

agent99 said:


> If you had had your 70/30 allocation in say XBB/XIU over say past 20 years, and rebalanced once a year, how would that have faired vs say, XIU alone? (I don't know and don't know a way to check that easily on-line.)


Interesting question. I'll use the portfolio visualizer web site and that's roughly 20 years of data.

70% XBB, 30% XIU -- performance was 5.54% CAGR with worst year -4.97% max drawdown -11.63% and Sortino ratio = 1.37
100% XIU -- performance was 5.80% CAGR with worst year -31.09% max drawdown -43.08% and Sortino ratio = 0.54

So while superficially the 100% stock portfolio has higher performance, notice how much riskier it was and how crazy the ride was. It crashed 43% at one point and returned -31% in a single year. Given how much panic the recent 10% market drop caused, I think we can assume that this would be incredibly stressful.

70/30 on the other hand did perform 0.26% CAGR worse but with far better risk measures. Now the worst year is only -5% and there's nothing at all like that 43% crash. Sortino measures risk adjusted return and it says the 70/30 portfolio is a significantly better risk-vs-reward deal.

Here's a link so you can see all this yourself through the back-testing web site, including a beautiful chart (bottom of page) of how the two different portfolios behaved over 20 years


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## james4beach (Nov 15, 2012)

Additional note to the above 70/30 simulation: annual rebalancing is actually pretty important. For the same 70/30, if you don't rebalance, CAGR drops by 0.31% and the % losses become worse. Sortino ratio becomes worse as well.

So this illustrates one benefit of liquid bonds (like XBB) in a portfolio such as 70/30. The ability to rebalance, notably during bear markets actually boosts returns (buy low, sell high) but also reduces risk in the portfolio by keeping target weights.


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## agent99 (Sep 11, 2013)

james4beach said:


> Additional note to the above 70/30 simulation: annual rebalancing is actually pretty important. For the same 70/30, if you don't rebalance, CAGR drops by 0.31% and the % losses become worse. Sortino ratio becomes worse as well.
> 
> So this illustrates one benefit of liquid bonds (like XBB) in a portfolio such as 70/30. The ability to rebalance, notably during bear markets actually boosts returns (buy low, sell high) but also reduces risk in the portfolio by keeping target weights.


I should have guessed you would have that info at your fingertips 

Using your site and switching to a 30XBB/70XIU allocation provides and even better CAGR. And 30XBB/70XIC better still. 100XIC better still. 

Presumably all interest and dividends are reinvested. No income withdrawn, and no taxes applied. So only valid in say an RRSP or TFSA in accumulation. In taxable account dividends vs interest would again benefit holding XIU/XIC even more.


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## agent99 (Sep 11, 2013)

Regarding rates, I hear all the big banks have reduced their prime rates by 0.5%. 

HISA at BMOs reduced for US$(.95%) but not yet for C$ (1.6%)


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## hfp75 (Mar 15, 2018)

Maybe the BoC is lowering the rate so that when they have to start buying bonds its easier to do !


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## GreatLaker (Mar 23, 2014)

james4beach said:


> Interesting question. I'll use the portfolio visualizer web site and that's roughly 20 years of data.
> 
> 70% XBB, 30% XIU -- performance was 5.54% CAGR with worst year -4.97% max drawdown -11.63% and Sortino ratio = 1.37
> 100% XIU -- performance was 5.80% CAGR with worst year -31.09% max drawdown -43.08% and Sortino ratio = 0.54
> ...


Good analysis James. One thing occurs to me though. The Bank Rate was around 5% 20 years ago vs. 1.25% now. That rate decline would have increased bond performance, and lessened the advantage of 100% XIU vs. 30% XIU / 70% XBB.

So what's the chance that decline in interest rates will continue forward for another 5 years or 20 years, repeating the relatively good performance of bonds? I try not to prognosticate, but I think the chance is low. Equities could perform horribly too, and probably will sometime, looking at recent returns and P/E. But personally I would not increase my bond allocation with the expectation of comparable forward performance.


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## james4beach (Nov 15, 2012)

It's true that bond funds got a "boost" from falling interest rates but they also do well if rates _gradually increase_ over time. Bond funds don't need interest rates to keep going down to perform well.

And separate from that, they would likely continue to have the low correlation to stocks, which is what makes them so valuable in a portfolio. Even if they have low performance in isolation, they still provide a useful counterbalancing benefit.

The one really bad scenario is if interest rates rise sharply. This would nail the bond fund and equities simultaneously. However, after the initial pain, the bond fund would then be generating higher returns going forward -- which is awesome.


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## GGuy (Mar 21, 2018)

agent99 said:


> You are looking at portfolio daily? I haven't looked, but I am sure our portfolio is up on FI side too. Almost everything we have yields over 3%. I just don't consider or even look at that.


Hey agent99, what are holding in FI that mostly yields more than 3% ? Just curious. I am shopping for more FI vehicles atm.


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## AltaRed (Jun 8, 2009)

GGuy said:


> Hey agent99, what are holding in FI that mostly yields more than 3% ? Just curious. I am shopping for more FI vehicles atm.


There are 16 issues of primarily BBB corporate bonds in the ~6-15 year category that have an Ask yield exceeding 3% at Scotia iTrade, and 1 BBB (Ford Credit) bond with 3 years left to maturity


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## GGuy (Mar 21, 2018)

AltaRed said:


> There are 16 issues of primarily BBB corporate bonds in the ~6-15 year category that have an Ask yield exceeding 3% at Scotia iTrade, and 1 BBB (Ford Credit) bond with 3 years left to maturity


Thanks. I have never fully understood the risk of these and I know opinions vary widely (on CMF). I have stayed away and focused my FI on GICs and HISA accounts.

But as rates fall I think I need to get educated....

"According to Moody's, the annual long-term default rate of bonds rated BBB/Baa (the lowest "investment grade") is about 0.3%; for BB/Ba, about 1.5%; and for B, about 7%. But in any given year, the default rate varies widely..."

I just screened corporate bonds with Ask yield exceeding 3% and see only one now. I can live with a small amount of my FI at risk of ~0.3%.

FORD CREDIT CANADA LTD	CAD	05/08/2023	1,000,000 102.043	3.05875	CORPORATE BOND


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## AltaRed (Jun 8, 2009)

I buy the occasional BBB corporate bond but it would be an Enbridge or Capital Power or similar that has a substantial regulated portion of their business or in a relatively non-cyclical industry. There is no way I'd buy that Ford Credit one for a number of reasons, namely auto loans could turn into a disaster in a recession with re-possessions. Enbridge's credit rating dropped after the Spectra purchase when they were way over-leveraged and I bought a couple of their notes back then. They will be maturing in the next year or two.

IOW, I carefully cherry pick through the BBB/BBB+ list and would rather get 3.0% from a good one than 3.5% from an iffy one. That all said, my RRSP is a blend of GICs and short term corporate bonds, giving me about 3% weighted average yield (or slightly less). That is obviously changing this year some softening in yields.


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## agent99 (Sep 11, 2013)

GGuy said:


> Hey agent99, what are holding in FI that mostly yields more than 3% ? Just curious. I am shopping for more FI vehicles atm.


I was talking about our existing holdings. With recent rate cuts, bond prices have gone up and therefore yields down (mostly below 3%). Pickings are even slimmer than they were. BMOIL don't have much on offer, other brokerages may be better. 

For 2026, maturity range is 2.35 to 2.9%. But that's a bit long for me. You can get Ford Credit bonds in 2.5 to 2.9% range with short (2.x-3.x yr) maturity. Not highly rated but still considered investment grade. There are also Morguard and Fairfax bonds that I hold, but not in BMOIL inventory at present), with similar yields. 

Others we hold are Convertible Debentures (not many now). More complex and you need to understand them. One I have from Firm Capital is bond-like and is trading at just over par with a yield in 5% range (FC.DB.E) Due May 31 2022, may be called 1 yr earlier (need to check that).

Our 2019/2020 yield on just Bond & GICs is ~3.7% (33 holdings, some held for a while). As bonds mature, I usually put the funds in a HISA until something suitable shows up on BMOIL. 

Split corp preferreds are bond like with 5yr maturity and usually extended beyond that. We own 4 or 5, I think. Single company ones like Partners Value Split PVS.PR.F, Life&Banc split (LBS.PS.A), Div Growth Split (DGS.PR.A), Div 15 Split (DFN.PR.A), Premium Income (PIC.PR.A), These usually yield in 4-6% range. No chance of much capital appreciation (or loss). They do generate cash flow!

We also have some actual preferreds that I don't consider fixed income. A couple of perpetuals. Over 5% yield on purchase price. Price varies with interest rates. These will be held forever. Not meant to be traded. Could be called. I have one rate-reset - bad choice given expected low reset rate.

Don't have a separate yield figure for above pfds, but it is approx 5%.

I am not recommending anything above. I tend to do things my own way. So do your own research!


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## agent99 (Sep 11, 2013)

I would have edited above seeing Alta has covered the options. (but although Captcha gone, still no edit) Seems BMOIL's offerings are higher priced that Scotia and others.


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## like_to_retire (Oct 9, 2016)

GGuy said:


> I have stayed away and focused my FI on GICs and HISA accounts.
> 
> But as rates fall I think I need to get educated....
> 
> ...


I seem to remember that Moody's downgraded Ford to junk last year. Finch and S&P still haven't done that, but realize that you are dealing with some shaky bonds there.

Fixed income's purpose is capital preservation, not making money. To make money, you concentrate on your equity allocation and leave the fixed income safe. Decide on your allocation of safe fixed income and don't take risks with it.

You're wise to have focused on GIC's since they are insured and offer the best return for their terms with respect to risk. The reason GIC's pay more than bonds is their lack of liquidity. If you don't anticipate requiring the cash, then a GIC offers the best rates. This tactic preserves your capital so you can concentrate on making money with your stocks. A percent here or there with fixed income is immaterial. You get iron clad returns of 2% with a GIC and you're willing to foray into junk bonds for a single percentage point using the allocation that should be assigned to capital preservation. Realize that if a bond defaults you can lose it all. It's like a stock going to zero. Why would you take such a risk with your fixed income?

ltr


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## james4beach (Nov 15, 2012)

At the risk of sounding like a broken record, I do not buy individual corporate bonds because I don't have enough money to make a large portfolio of diversified corporates, and I'm also highly suspicious of more recent corporate bonds and Bay Street's tricks, as I wrote in detail here:
https://www.canadianmoneyforum.com/showthread.php/139990-Warning-about-corporate-bonds

However I would buy XSH for short term corporate bonds. The yield is obviously pretty low.

In this low interest rate environment, I have simply given up on the idea of funding my lifestyle needs using fixed income yield. Instead, I have a diversified portfolio which so far has been performing about 6.5% CAGR at a level of risk that I'm comfortable with. My pessimistic estimate for its performance is 4.5% CAGR and therefore I think this portfolio has enough _total return_ to fund my lifestyle needs.

But this is a totally different approach than relying on fixed income returns. Instead, I am taking risk, and relying on diversified portfolio returns.


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## AltaRed (Jun 8, 2009)

LTR, your link references Ford, not Ford Credit Canada. Different entities can have different credit ratings albeit not usually (depends on inter-company guarantees). In any event, I wouldn't touch it for any amount of money regardless..... Cyclic businesses like this creep me out.


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## GGuy (Mar 21, 2018)

AltaRed said:


> I buy the occasional BBB corporate bond but it would be an Enbridge or Capital Power or similar that has a substantial regulated portion of their business or in a relatively non-cyclical industry. There is no way I'd buy that Ford Credit one for a number of reasons, namely auto loans could turn into a disaster in a recession with re-possessions. Enbridge's credit rating dropped after the Spectra purchase when they were way over-leveraged and I bought a couple of their notes back then. They will be maturing in the next year or two.
> 
> IOW, I carefully cherry pick through the BBB/BBB+ list and would rather get 3.0% from a good one than 3.5% from an iffy one. That all said, my RRSP is a blend of GICs and short term corporate bonds, giving me about 3% weighted average yield (or slightly less). That is obviously changing this year some softening in yields.


I didn't intend to buy the Ford Credit bond, just showing what I saw with Ask yield exceeding 3%. I'd never buy anything Ford now including their vehicles. Although my Taurus wagon 20 years ago was a decent family car.:subdued:

But if rates stay low for long (and appears they will) I will definitely need to expand my FI holdings so as you mentioned a mix of GICs and corporate bonds or just keep it simple and add to my CBO and XBB bond ETFs. Like I said, I need to do some research.


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## AltaRed (Jun 8, 2009)

FWIW, my GIC/C bond 5 year ladder is confined to my small RRSP from which RRIF withdrawals have to start in 2021. It makes no difference in the overall scheme of things so I really could go with a Bond ETF as well. 

That is indeed what I will likely do after I complete either 1 or 2 five year cycles, such that by 2031 it will likely be a single bond ETF. I'll be too old to screw around with managing a puny residual in a 5 year ladder anyway. In the meantime, I will have a bit of fun with it.


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## GGuy (Mar 21, 2018)

agent99 said:


> I was talking about our existing holdings. With recent rate cuts, bond prices have gone up and therefore yields down (mostly below 3%). Pickings are even slimmer than they were. BMOIL don't have much on offer, other brokerages may be better.
> 
> For 2026, maturity range is 2.35 to 2.9%. But that's a bit long for me. You can get Ford Credit bonds in 2.5 to 2.9% range with short (2.x-3.x yr) maturity. Not highly rated but still considered investment grade. There are also Morguard and Fairfax bonds that I hold, but not in BMOIL inventory at present), with similar yields.
> 
> ...


Hey agent99 thanks for sharing this. I will for sure do my own research - especially interested in the Split corp preferreds. Anything yielding in the range of 4-6% range without much chance of capital loss is interesting. Any info you can share on them would be appreciated.

I own 7 rate reset preferreds (most recommended by an ex-advisor) that have all experience significant capital loss but I will also hold forever and collect divs.


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## agent99 (Sep 11, 2013)

GGuy said:


> Hey agent99 thanks for sharing this. I will for sure do my own research - especially interested in the Split corp preferreds. Anything yielding in the range of 4-6% range without much chance of capital loss is interesting. Any info you can share on them would be appreciated.


This explains split shares. https://en.wikipedia.org/wiki/Split_share_corporation

In a bull market the capital shares can do well but in bear market they drop at least twice as much as the underlying shares. I did have them early on and did quite well. But this is hardly the time to own them for many of us. 

As explained in the link, the preferred shares are relatively safe as they almost always backed by solid blue chip equities. Market price does vary a bit, but generally stays around the issue price. They do pay the fixed dividend specified in the prospectus. And it is a dividend, so these are better tax-wise, when held in a taxable account, than fixed income paying interest.

At times like this, holders of capital shares may retract them (usually, but not always, they can do this once a year). If an equal amount of pfds are not retracted at same time, then the corp will usually redeem some of the pfds to the maintain the required balance between capital and pfd shares. Usually at a fair price. Only happened once to me, but could happen more these days. Not a problem really.


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## agent99 (Sep 11, 2013)

agent99 said:


> If we are supposed to hold fixed income to safeguard us from a market crash, it might be worth thinking about how we would cash in our fixed income if we had to.


Trying to find a thread to post in, so chose this one because my comment above is still relevant to me. I have about $300k in cash spread over several accounts that I need to deploy. Ready cash for 1 yr, after that I would be OK with annually maturing GICs or bonds. But what is on offer?

BMOIL HISA rates. Now 0.25%! Just slightly better than nothing!
GICS
1yr (1.94-2.04%)
2yr (2.04-2.4%)
3yr (1.96-2.4%)
4yr (2.11-2.35%
5yr (2.25%-2.4%)

Corporate bonds with less than 1 yr maturity. Excluded car credit and bank NVCC with calls within 1yr.
Interpipeline July2020 3.546%
CNR Aug 2020 3.798%
Couche-Tard Aug 2020 2.066%
Enbridge Nov 2020 2.547%
SNC Nov 2020 3.044%
AT&T Nov 2020 2.318%
Teranet Dec 2020 2.758%
Choice Prop Dec 2021 2.334%
CWB Mar 2021 2.634%

Thinking most/some of these should hopefully not default within a year? Better ones yield same or less than GICs.

I limited bonds to less than 1 yr, but in 1-3 yr maturity range there are quite a number with over 3% yield, but would not risk cash that far out with those companies.

I wouldn't touch the principal unless we had to. This would be for emergency use if other sources of income (dividends/CPP/OAS/existing bonds)) are insufficient. Looking like mostly GICs, but maybe one or two short term bonds.

*ADDED: I was surprised to see AT&T bonds listed in Canada. Anyone know anything about them?
OK, did find out that they are one of what are called Maple Bonds. Foreign company bonds issued in C$. *


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## Eclectic12 (Oct 20, 2010)

While I can sympathise on the HISA being next to nothing ... it seems that the March 30th update says that credit balances get nothing while debit balances are charged at 20% or so.


Cheers


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