# Bond yields after US election



## james4beach (Nov 15, 2012)

On Wednesday, US Treasury bonds fell sharply, driving interest rates (bond yields) much higher. The US 10 year bond increased from 1.85% to 2.07%, an increase of 22 basis points.

At this point I think it's very unlikely that the Federal Reserve will raise rates at the short end of the curve. The bond market has already dramatically increased interest rates.

Canadian bonds fell sharply as well, driving Canadian interest rates higher. Bond funds suffered losses as a result. The current Canadian government bond yields are:

5 year: 0.82%
10 year: 1.37%
30 year: 2.02%

Let's monitor and see how this develops. Bond ETFs just became more attractive, with these higher yields.


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## james4beach (Nov 15, 2012)

After a time delay, GIC rates should also react upward to this. Currently TDDI is showing 5 year GICs rates, for Big Five bank issuers,
BNS,BMO,RBC at 1.700

I expect to see this rate go higher. I would advise against buying GICs until you see this rate move higher along with bond yields


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## olivaw (Nov 21, 2010)

Thanks James. I am not a trader but I do have some cash looking for a five years guaranteed ROR.


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## humble_pie (Jun 7, 2009)

^^

among the pillars of finance trump has indicated he wants to bring down is dove-ish Janet Yellen.

although the TD's top wealth management strategist points out that trump has nobody to replace Yellen with, so she's likely to serve out the remainder of her term.

.



.


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## olivaw (Nov 21, 2010)

^did he say that he wanted the Fed to raise interest rates? It would help me but I can't see how he plans to stimulate 4% annual economic growth by raising interest rates.


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## mordko (Jan 23, 2016)

At one point Trump said he was going to default on debt. Of course we don't know what he would actually do, but perhaps people are getting cold feet on US government debt.


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## humble_pie (Jun 7, 2009)

my understanding re US gummint paper is that the biggest portion - i've read up to half - is held by China. This has been true for decades.

the theory goes that if china were to dump its USD T-bills, the US dollar would crash & burn into zilch.


.


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## jargey3000 (Jan 25, 2011)

humble_pie said:


> my understanding re US gummint paper is that the biggest portion - i've read up to half - is held by China. This has been true for decades.
> 
> the theory goes that if china were to dump its USD T-bills, the US dollar would crash & burn into zilch.
> 
> ...


just wonderin', humble: does this "theory" come from the same folks who were predicting a Clinton victory, and that the markets would immediately crash on a trump victory ...


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## atrp2biz (Sep 22, 2010)

olivaw said:


> ^did he say that he wanted the Fed to raise interest rates? It would help me but I can't see how he plans to stimulate 4% annual economic growth by raising interest rates.


Tax relief of repatriated earnings and infrastructure spending are major components of his platform.


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## mordko (Jan 23, 2016)

Interestingly Canadian reset preferreds are going up. Does it mean that we should expect higher interest rates in Canada soon? I find this a bit surprising.


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## james4beach (Nov 15, 2012)

Well, when bond prices go down interest rates go up. Today again, both US and Canadian bonds are getting hammered and interest rates are up further today.

Back in September, Canada's 10 year yield was: 1.04%
Yesterday: 1.37%
Today: 1.43%


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## atrp2biz (Sep 22, 2010)

mordko said:


> Interestingly Canadian reset preferreds are going up. Does it mean that we should expect higher interest rates in Canada soon? I find this a bit surprising.


This makes perfect sense to me.

http://canadianmoneyforum.com/showthread.php/1730-What-are-you-buying/page667



> I think yielding names like utilities are going to underperform. Yields have jumped and I think it will be a precursor of things to come. With this view, I am considering adding to my collection of rate reset prefs.


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## james4beach (Nov 15, 2012)

I'm concerned about this sharp increase in bond yields (interest rates). This could kill the economy / consumer spending / business spending.

Benchmark govt bond yields, which impact everything from business loans to fixed mortgage rates, are way up in the last few days. The Govt of Canada 10 year yield has increased from 1.00% in last few months to 1.43% currently and still climbing.

Borrowers have become accustomed to ultra-low rates so I think that these kinds of increases can have a significant effect. In particular interest rates are shooting higher at a time when it looks like Canadian housing is weakening -- this could create the perfect storm


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## mordko (Jan 23, 2016)

Well, i wouldn't call it a sharp increase but the risk is more tangible today than it was yesterday.


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## doctrine (Sep 30, 2011)

I don't see any evidence that the reasons behind why rates are low have changed. Is there high growth or inflation anywhere? IMO this is all because traders think Trump is going to borrow and spend like a madman. I think the US Federal Govt is too indebted to spend enough to move the needle to actually significantly impact inflation. I could be wrong, but I think lower for longer is still alive and well, if temporarily off the radar. Give it two or three quarters of < 2-3% GDP growth and I think reality begins to return. I think most of this is just a bounce off the bottom, 1% for 10 yr is crazy low, 2-3% seems reasonable, it should at least track inflation. Borrowing money for 10 years at 3% is still crazy low and not likely to significantly impact business.


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## james4beach (Nov 15, 2012)

Right, these rising rates may be limited and in the absolute sense they are still low.

But the current day to day price changes are quite extreme -- the bond market is moving fast. Look at the chart of the US 10 year yield
http://stockcharts.com/h-sc/ui?s=$TNX&p=D&yr=3&mn=0&dy=0&id=p57778841721

That speed of change hasn't been seen in a long time, and it could be disruptive to markets & the economy.


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## Spudd (Oct 11, 2011)

james4beach said:


> Right, these rising rates may be limited and in the absolute sense they are still low.
> 
> But the current day to day price changes are quite extreme -- the bond market is moving fast. Look at the chart of the US 10 year yield
> http://stockcharts.com/h-sc/ui?s=$TNX&p=D&yr=3&mn=0&dy=0&id=p57778841721
> ...


It looks like it changed about that fast in Oct 2014, though in the opposite direction. Didn't last long; maybe we will see a similar turnaround this time as well. Or maybe not!


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## Argonaut (Dec 7, 2010)

Finally the bond bubble is bursting. Sanity is prevailing and those who have been collecting bonds at little to no yields may now be facing some consequences. Or it could just be an until-Fed correction, who knows? These things still don't really interest me until they are yielding a few percent above dividend stocks.


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## madmoney (Jan 17, 2015)

What are your thoughts on continuing to hold a bond ETF like VAB? Time to move that cash into a different fixed income, or leave it where it is and weather this storm?


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## james4beach (Nov 15, 2012)

It's all about time horizons, like with stocks. VAB has avg 11 year maturity. The way bond fund math works, returns correlate very strongly with the YTM when you look out over the maturity of the portfolio.

If your time horizon is a minimum ~ 15 years, then absolutely keep using VAB. Every time they roll over their bonds, they are now getting higher yields -- this is great.

However if your time horizon (like drawing money out of VAB) is shorter than 15 yrs, then I'd choose an appropriate bond fund. For imminent needs of the money within a couple years, you'll want to be in maybe VSB, VSC, XSH. Or GICs.


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## james4beach (Nov 15, 2012)

By the way, something I showed before is the maximum drawdown of the "10 year bond portfolio" (i.e. XBB, VAB) going back decades.

Even during periods of skyrocketing interest rates, drawdown was very muted. And it was temporary: performance bounced back as new bonds were purchased at much higher yields.

The point is that rising interest rates will make bond ETFs fall, but only temporarily and to a limited extent. The only concern for each investor is what their time horizon is.


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## Argonaut (Dec 7, 2010)

Interesting take on Trump by legend Ray Dalio.
http://www.zerohedge.com/news/2016-11-15/ray-dalio-what-donald-trumps-presidency-will-look

He thinks we may have seen the 30-year top in bond prices, of which I tend to agree. My favourite part is the asset class return chart because I am a visual guy:








Judging by this, bonds may be trash for the next 20 or 30 years. I'm a gold bug but see no hurry to go there either. Stocks are the place to be, with cash as insurance.


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## james4beach (Nov 15, 2012)

And end to the ~ 33 year bull market in bonds? That would be something!

People have been calling that top for years, at least 6 years ago. Eventually the bond bull market will end.


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## humble_pie (Jun 7, 2009)

Argonaut said:


> Interesting take on Trump by legend Ray Dalio.
> http://www.zerohedge.com/news/2016-11-15/ray-dalio-what-donald-trumps-presidency-will-look
> 
> He thinks we may have seen the 30-year top in bond prices, of which I tend to agree. My favourite part is the asset class return chart because I am a visual guy:
> ...




i liked the asset return chart too & saved it in pictures file. It sure does show how bonds are done like dinner.

dalio i imagine is farther along with his buying than he's willing to let on to the media. In public he's dithering about how he won't take his preliminary views to the bank yet, but in reality i imagine he's begun going long.


PS this was not a zerohedge offering. Looks like zerohedge stole your abbreviated version from mainstream media late this afternoon., unless they have paid for a licensing arrangement.

myself i read the original story in Bloomberg early this am. Plus i also read the full text from dalio, exactly as he published it in the wee hours early this am, in linkedIn.

it's likely that mr. Dalio tipped bloomberg days ago that he would be publishing in linkedIn. Dalio may also have supplied a pre-publication draft of his text to bloomberg journalists so they could prepare their story to break a few hours later.

the moral of all this goes: Don't rely on alternative media. They are late & they are often wrong. They often leave out entire critical components of a story. I know right-wingers don't want to believe this, but the plain truth is news always appears first & most reliably in mainstream media.

alternative media are good for a glance & a laugh. Sometimes they do dig up interesting tidbits & sidebars. But they can never be counted upon to deliver entire stories as fast or as accurately as the pros.

.


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## doctrine (Sep 30, 2011)

For bond prices to keep rising, there has to be an increase in inflation and economic growth, or central bankers will continue to run the printing presses in overdrive. They can rise on speculation that it will occur, but eventually there has to be evidence, or down we go.


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## mordko (Jan 23, 2016)

^ also the sun rises in the west.


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## james4beach (Nov 15, 2012)

Bond prices can also rise if central banks keep pumping QE money into the bond market. Or if there's a flight to safety, for instance with high market volatility, or deflation. It's possible for bonds to persistently trade at 0% or even negative yields.

Have you considered the possibility that govt bonds yield 2% because investors perceive low potential for stock returns going forward? The 2% return may still turn out to be not so bad.

If it was a "given" that stock indices will return 5% or 10% going forward, why would any bank, pension fund, or sovereign fund buy bonds? I don't think this is dumb money.


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## lonewolf :) (Sep 13, 2016)

james4beach said:


> And end to the ~ 33 year bull market in bonds? That would be something!
> 
> People have been calling that top for years, at least 6 years ago. Eventually the bond bull market will end.


 Markets often turn on the Fib #s


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## james4beach (Nov 15, 2012)

And there we go, GIC rates starting to tick higher. The big five bank rates haven't changed, but the following two (focusing on major banks that I'd actually lend to) just ticked higher. My guess is that the big five banks will also increase their GIC rates soon. Otherwise, they won't be able to attract deposits.

5 year GIC rates at iTrade on November 15
Presidents Choice Bank, 1.92%
National Bank, 1.91%

A good comparison/proxy for these is XSH and VSC (which are liquid), currently with yield-to-maturity 1.85%


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## james4beach (Nov 15, 2012)

As predicted, the GIC rates ticked higher again on Wednesday November 16. Here are 5 year GIC rates from major banks that I'd be comfortable with

Presidents Choice Bank, 1.92%
National Bank, 1.91%
Canadian Western Bank, 1.90%
Bank of Nova Scotia, 1.80%
_rest of big five are still lower_

I will probably hold out and wait to see something over 2%, or go with my credit union anyway.


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## gibor365 (Apr 1, 2011)

> And there we go, GIC rates starting to tick higher.


 I didn't notice it at ll... on opposite about 6 months ago I bought 18 mo GIC at Oaken at 2.75%, nothing like this now


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## james4beach (Nov 15, 2012)

Here I am surveying regular rates through a GIC broker. There will always be promotions elsewhere and teaser rates, and absolutely, get those higher rates if you can. You can always get higher rates at the very small banks and specialized trust lenders.

But looking at the regular non-promo rates, they have started moving higher along with bond yields.


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## lonewolf :) (Sep 13, 2016)

doctrine said:


> For bond prices to keep rising, there has to be an increase in inflation and economic growth, or central bankers will continue to run the printing presses in overdrive. They can rise on speculation that it will occur, but eventually there has to be evidence, or down we go.


 Fear of default can push yields higher. Inflation or economic growth are not needed for higher rates


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## james4beach (Nov 15, 2012)

lonewolf that's true, if investors believe there is a higher risk of default, they will sell bonds and drive the yields higher.

Another factor (and I think this is what's really happening here) is the issue of supply vs demand of debt. Any market traded security, including bonds, moves based on supply-demand.

I think it's widely believed that Trump's plans will add a significant amount to the US debt (supply UP) at the same time he will pressure the Federal Reserve against quantitative easing (demand DOWN). When the supply of bonds goes up and demand goes down, it's natural for the price to drop.

My best guess is that the market is re-pricing bonds based on that shift in the forecast for US Treasuries supply & demand. Other bonds like Canadian bonds come along for the ride, because US Treasuries drive the entire global bond market.


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## gibor365 (Apr 1, 2011)

> There will always be promotions elsewhere and teaser rates


 My points that I didn't see any real promos last half year


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## lonewolf :) (Sep 13, 2016)

Hillary was to close to Goldman. Interest rates if they kept heading lower into the negative I think Hillary would have been more likely to have out lawed cash then Donald.


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## new dog (Jun 21, 2016)

humble_pie said:


> i liked the asset return chart too & saved it in pictures file. It sure does show how bonds are done like dinner.
> 
> dalio i imagine is farther along with his buying than he's willing to let on to the media. In public he's dithering about how he won't take his preliminary views to the bank yet, but in reality i imagine he's begun going long.
> 
> ...



What you say is true and then the mainstream twists it and slants it in the direction they want it to go.


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## gibor365 (Apr 1, 2011)

Yields on US bonds got higher after elections, US short term YTM 1.85% and mid-term 3%


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## lonewolf :) (Sep 13, 2016)

@ the downward slopping trend line that has been in place for last 30 years. The 30 year cycle stretched a little most likely bottomed last summer. Most everyone on one side of the trend on this one. As everyone thinking so many fundamental reasons interest rates headed lower. The primitive thinking of learning to duck when someone throws a rock @ your head & its heading straight towards your head fails to take the math further to that of cycles.


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## dogleg1 (Jul 4, 2016)

J4B: So if this flux in bond prices is to continue what should we expect for balanced funds with heavy bond components? MAW104 for example.


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## lonewolf :) (Sep 13, 2016)

Dogled if interest rates rise & you want to be in a bond fund & not lose money on a rise in interest rates. Hold target date bond fund to maturity. A bond in fund might default loss will not be from rise in interest rates


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## james4beach (Nov 15, 2012)

dogleg1 said:


> J4B: So if this flux in bond prices is to continue what should we expect for balanced funds with heavy bond components? MAW104 for example.


Well, flux/volatility is one thing. What would be different and more challenging is if bond yields (interest rates) continuously rise from here, for many years to come. e.g. a 10 year streak of rising interest rates will cause poor performance. This hasn't happened for a very, very long time.

The critical thing, as with stocks, is to match your time horizon to the investment. Bond funds typically have 10 year average terms, so they are fine if your time horizon is over 10 years. Unfortunately I can't easily find the bond portfolio statistics for MAW104... Mawer is not making this easily available, a bit disappointing.

In a gradually rising rate environment, the bond fund should be OK and still have a reasonable return. However in a rapidly rising environment there will be losses seen in the bond fund, if rates continue rising for a long stretch of time.

Generally I'd say that if your time horizon is more than X years then it's fine to hold a bond fund, where X is the portfolio's average term or maturity.


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## dogleg1 (Jul 4, 2016)

Thanks. As far as I can see the MAW104 holds about 31% in bonds held in its MAW100 bond fund which lists a wide range of government bonds etc. I appreciate your input.


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## james4beach (Nov 15, 2012)

I can see which bond funds MAW104 holds, but what I can't find anywhere is a portfolio metric that says what their bond average maturity is. Yes it's possible to calculate it from the list of holdings, but I haven't bothered. 10 years is a safe assumption.

Something I forgot to mention is that, no matter which directions bonds move, adding bonds to the mix increases overall safety of a portfolio. This is because they don't correlate with stocks (it's a different asset class) and they don't drop as much as stocks can. Similarly, you can add gold to a portfolio as yet another asset class with low correlation -- that's something myself and Argonaut do.

Even if interest rates go up, bonds will still do their volatility-dampening job. For example, 2008 losses during the crisis

* MAW104, -16%
* RBC Monthly Income (another good balanced fund), -11%
* Mawer Canadian Equity (no bonds), -30%

Yes volatility-dampening comes at the cost of performance. However for a retiree who is drawing money out of this portfolio, it's essential to have low volatility due to "sequence of return" risk.

That's why balanced funds are really good for retirees, and I have no hesitation recommending Mawer Balanced or RBC Monthly Income. Despite their fees, both have outperformed the low-cost ETF route of combining XIU & XBB... something I didn't believe was possible until others in this forum pointed it out to me


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## mordko (Jan 23, 2016)

Bonds used to play this role. Last couple of years the governments have broken bonds. Too much regulation on banks. The risk is hard to evaluate. Liquidity is questionable for a lot of bonds. And the pricing is hard to fathom. And they seem to be correlated to stocks. November has been different, but there has not been that much movement.


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## james4beach (Nov 15, 2012)

mordko, you are saying that bonds might no longer play a role in portfolio diversification -- govt bonds might have lost their traditional characteristics?


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## dogleg1 (Jul 4, 2016)

Thanks for your valuable and well- informed opinions. I really appreciate the input. I think today I will fill my TFSA with MAW104.


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## mordko (Jan 23, 2016)

james4beach said:


> mordko, you are saying that bonds might no longer play a role in portfolio diversification -- govt bonds might have lost their traditional characteristics?


I don't know the future, but there has been a strong correlation between bonds and stocks over the last few years.


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## james4beach (Nov 15, 2012)

mordko said:


> I don't know the future, but there has been a strong correlation between bonds and stocks over the last few years.


I think it's even longer than the last few years. There's been a simultaneous bull market in both stocks and bonds for 35 years. For both assets, this is historically atypical.

Bond-fans and stock-fans take turns criticizing each other over this point, but in the mean time, people seem to forget that it's a simultaneous bull market. And the fact that it's simultaneous in these asset classes means that balanced funds have been the big winners... posting both amazingly good returns while still apparently controlling volatility. Almost too good!

So here's what I'm really worried about: a simultaneous bear market in stocks and bonds. It's unlikely that it would last anywhere near the length of the secular bull, but even a 10 year bear market in stocks and bonds together would devastate pension plans and retirees.

Two possible mitigations for that are: diversify into more assets (add gold and real estate), and make sure your time horizon is well beyond 10 years


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## lonewolf :) (Sep 13, 2016)

Trump & Norah O Donnell CNN

Trump: I m the king of debt. I m great with debt, nobody knows debt better then me. I have made a fortune by using debt & if things do not work out I renegotiate the debt. I mean that is a smart thing, not a stupid thing.

O Donnell: How do you renegotiate the debt ?

Trump: You go back & say the economy crashed. I m going to give you back half.


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## lonewolf :) (Sep 13, 2016)

My speculation is this time the rise in interest rates will not be blamed by a strong economy, instead the rally do to risk of default.


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## dogleg1 (Jul 4, 2016)

J4B, et al: Further to the bond component and diversification; I had a bad experience with an internal CIBC TFSA fund which I collapsed and am reinvesting. My question is whether to go all into MAW104 or to split it between MAW 104 and BMO stock. Does this make sense or is there sufficient diversification in MAW104.


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## Spudd (Oct 11, 2011)

dogleg1 said:


> My question is whether to go all into MAW104 or to split it between MAW 104 and BMO stock. Does this make sense or is there sufficient diversification in MAW104.


Splitting it like that makes it way less diversified - MAW104 contains BMO stock so you would be very overweight in BMO.


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## james4beach (Nov 15, 2012)

I agree with Spudd, adding the BMO stock does not help your situation.

If you are happy with the equity/bond ratios in MAW104, and its country breakdown, it's probably good enough on its own.

What is the CIBC fund that you are unhappy with?


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## dogleg1 (Jul 4, 2016)

It was one of their internal CIBC 'Personal Portfolio Funds',- ' Monthly Income Balanced Portfolio' . I had it for about 18 months paid a 2% MER and was lucky to break even on exit. It was a poor decision to go into it. Thanks


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## james4beach (Nov 15, 2012)

Today I bought Government of Canada CMHC, 9 year bond at 2.03% yield ... or 2.00% yield after fees.

And by the way, XBB's yield to maturity is now 2.01% with average maturity of 10.2 years. Net of fees the XBB ytm is about 1.7%


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## lonewolf :) (Sep 13, 2016)

J4B good move not investing in bond fund with these low interest rates. another option is going with a stable value fund to help protect from rise in interest rates. Though there is risk in all investments


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## new dog (Jun 21, 2016)

I think now is a good time to buy the bond like James did. Longer term rates will still go higher but for now I think they have gone down enough and priced in any Fed rate hike.


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## james4beach (Nov 15, 2012)

My strategy works like this: I generally try to adhere to my target asset allocation (whatever % stocks, bonds, gold)

But I maintain those %s lazily. When I see that a category has dropped substantially, I use that as an excuse to boost my allocation in that category. "Buy low".

The two depressed areas I see as opportunities to buy right now are *gold* and *bonds*. That's assuming that you already intended to accumulate these assets long-term


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## new dog (Jun 21, 2016)

Yields are too low for me to consider holding long term. With the dollar so high I was thinking of buying a little FAP. I will wait a week or two until the rate hike is closer.


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## gibor365 (Apr 1, 2011)

I'm buying in small trenches (have a lot of free trades) US short and medium term investment grades bond ETFs. YTM are 2%+ and 3.2% respectively.


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## james4beach (Nov 15, 2012)

Just don't go too far out in maturity! Also I think govt bonds have been beaten up more than corp bonds, so the real value might be in govt debt


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## Argonaut (Dec 7, 2010)

What's the best way to short bonds? I'm thinking maybe buying puts on TLT. The options are pretty liquid. Look out below!


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## james4beach (Nov 15, 2012)

I wouldn't advise it, but you can definitely short bonds. TLT for the long end of the curve, IEF for mid part of the curve, LQD for corporates, AGG for the whole darn bond complex.


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## Argonaut (Dec 7, 2010)

Over the long-term, investors in the accumulation phase don't mind a rising interest rate environment, as they can always invest interest/savings into higher YTMs. But the market has decided that Trump represents a downward trend for bonds, so that's the short term trade. I expect TLT to get pummeled in the next 4 years. Puts are cheap, I'll buy one.


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## lonewolf :) (Sep 13, 2016)

Commercials get it right @ market turns. US 30 year T bonds last July commercials had largest short position ever the DSI 95% bulls @ July high. This would be a classic set up to the end of the 33 year bond bull. Bond bull & bear markets often last 25 - 35 years & trend @ a rate greater then .15% a year which is about the yearly spread per a year offered @ GICs @ online credit unions which usually have the highest GIC rates or very close to the highest rates. 

GICs online Manitoba credit union
1.7% daily interest 
1.85%1yr
1.95% 2yr
2.00% 3yr
2.15% 4yr
2.30% 5yr

The seasonal cycle is often the most powerful cycle of markets.
Looking @ a seasonal chart 5 year T bonds from 1990 1999 from seasonal high in June to the low bonds averaged -.58% decline by eye balling chart, From seasonal low averaged about .31% gain to seasonal high.(end of April to June high trend close to flat)

My thinking is as my GICs now come do will go with 1 year GICs gain an extra .15% over daily & purchase end of April or May @ the seasonal high locking in seasonal high. Though it might not matter much looking @ a DJI chart going back to 1960 the week half of the seasonal period over those years had about a zero gain all the gain was made in the strong seasonal time period. When interest rates top out 25 plus years from now then will lock in long term.


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## AnonymouslyInvesting (Nov 29, 2016)

If you're buying physical bonds, or GICs in lonewolf's case, focus on the yield to maturity. As long as you hold until maturity, you'll get that rate of return even if yields do rise (you might experience the price of the bond going down in the interim, but your return will be the YTM. That being said, especially if you're buying in the 1-5 year range in a non-registered account keep an eye on the price. If you buy a 5 year bond at $110, that bond will go to $100 and you'll be down ~10% as a capital loss. Sure, the interest payment would be higher, but interest is taxed at a far higher rate, so I'd say buy close to par. 

I think yields will rise gradually, and thus we have moved into an era of 'reinvestment opportunity' where you can reinvest your bond ladder at higher and higher rates.

Be careful of the passive ETFs out there, ones like CBO in particular. To meet their lofty yields, they invest in bonds that are trading well above par so they are essentially designed to lose capital. The yield is ~2.9% but the price consistently falls by over 1.1% so your net return is something that is more in-line with lonewolf's 1 year GIC strategy. There's a great article showing the mechanics behind this: http://www.anonymouslyinvesting.com/home/passive-fixed-income-etfs-in-trouble


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## james4beach (Nov 15, 2012)

I think GIC rates are way too low right now. They should go up with general interest rate (bond yields) but the big banks are stubbornly refusing to increase the GIC rates, even though general interest rates have gone way up in the last few months.

I track the 5 year GIC rate from the Big Six banks (available at discount brokerage) vs the Government of Canada 10 yr benchmark yield. This gives me an indication of whether or not GICs are a good deal.

In the past I've bought GICs when the rates were 0.8% to 1.0% higher than the benchmark bond yield. For example in Jan 2016, the govt benchmark yield was 1.22% and I could find a 5 yr big bank GIC at 2.25% which is 103 basis points extra yield!

Today however the govt benchmark yield is 1.68% and the highest 5 yr big bank GIC rate is 1.80%, *only 12 basis points extra yield. A ripoff!*

Notice that the govt benchmark yields are substantially more than January, yet the GIC rates are lower.

At current bond market conditions, a good deal for a big bank 5 yr GIC would be in the neighbourhood of 2.5%


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## mordko (Jan 23, 2016)

Predicting anything is impossible right now. Will Trump pump cash into economy and enforce disastrous protectionism? Yep, that's inflationary. Short term. On the other hand the levels of debt are such that any substantive rise in interest rates would kill the economy, so there has to be a ceiling. Also insurance companies and pension funds have no choice but to buy bonds at any prices.

Anything is possible.


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## dogleg1 (Jul 4, 2016)

J4B: In your strategy with gold what is your current opinion about Goldcorp?


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## james4beach (Nov 15, 2012)

mordko is right, very difficult to predict right now. Trump is a wildcard. I'm making wild speculations here:

Personally I'm neutral-to-bearish on gold at the moment. During weak times in the metal, mining stocks don't perform well. With this slant I'm much more interested in accumulating metal bullion or exposure to bullion (GLD, MNT) than miners as this has always outperformed during weak phases in gold.

Goldcorp has been an awful performer for a long time, consistently doing worse than the metal price. This chart says it all. This is comparing G vs MNT as a proxy for the price of gold, both in CAD

http://stockcharts.com/h-sc/ui?s=G.TO&p=D&yr=4&mn=0&dy=0&id=p05771688796


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## dogleg1 (Jul 4, 2016)

J4B: Yes the chart says it all I suppose or at least for the present time when mining stocks seem to be out of favour. As for Goldcorp I must say it was good to me back when they bought Gold Eagle at Red Lake. Then you could roll $1.00 of G Eagle into about $20. when Goldcorp bought it. Not so now!


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## Mitch (Nov 26, 2016)

james4beach said:


> It's all about time horizons, like with stocks. VAB has avg 11 year maturity. The way bond fund math works, returns correlate very strongly with the YTM when you look out over the maturity of the portfolio.
> 
> If your time horizon is a minimum ~ 15 years, then absolutely keep using VAB. Every time they roll over their bonds, they are now getting higher yields -- this is great.
> 
> However if your time horizon (like drawing money out of VAB) is shorter than 15 yrs, then I'd choose an appropriate bond fund. For imminent needs of the money within a couple years, you'll want to be in maybe VSB, VSC, XSH. Or GICs.



This is great information, thanks. I need to add to the fixed income portion of my portfolio -- I'm about 12% in bonds (8% VAB and 4% VSB). Want to bump up to around 35-40%. It doesn't have to be in bonds though. Are bonds the way to go? I would be in it for the long term (over 15 years).


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## james4beach (Nov 15, 2012)

It sounds like you'll be shifting a lot of money into fixed income. Will that be in a registered or non-reg account?

I would probably combine VAB, VSC, and a 5 year GIC ladder with the highest weight in VAB.

VAB - the typical 10yr ish maturity (registered acct)
VSC - short term corporates (registered acct)
GICs - always buy 5 yr ones (suitable for reg or non-registered)

You could also simplify it a bit and only hold VAB and the GICs, because the GICs give you short-term maturity exposure so they are almost a duplication of VSC.


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## Mitch (Nov 26, 2016)

Thanks james4beach.

In a registered account. Although I need some fixed income in an RESP as well.

I've read your previous posts about the spread b/w the Gov 10 year bond and GIC rates and it's abysmal. Maybe I should wait on the GIC's?


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## james4beach (Nov 15, 2012)

Mitch, at current prices I don't think GICs are appealing. Relatively speaking, bond funds like VAB are more attractive right now.

Given the poor GIC rates right now, perhaps add to your VAB and also consider swapping VSB for VSC for a little more yield. You can adjust the proportion of VAB & VSC to your liking, as far as interest rate risk (use average maturity as a guide). Both are good fits for registered accounts.

I think VAB and VSC are both buyable here, and I would spread out the purchases over time as opposed to one shot. GICs will become attractive again some time down the road. I personally am doing exactly what I describe here... added to VAB-like exposure recently and am waiting for GIC rates to improve.


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