# Bonds, GICS & HISAS - Where to park cash



## l1quidfinance (Mar 17, 2017)

Given the woeful rates where do we put cash at the minute? This doesn't need to be risk free but should be free from credit risk unless we go into complete Armageddon. 

Tangerine HISA offer just expired so I'm parking a little cash now back in EQ and Happy Savings at 1.25%
Gics almost pointless given the fact you are locking the money in.

Where would something like XBB play into the mix. Granted you are adding market risk into the equation. What would you use as the minimum hold period for XBB. 

MY thinking with XBB is I can at least put the money into an investment account. Then if an opportunity arises cash is effectively there to trade with and if I see nothing I can clip some coupons along the way. For this specific tranche of cash I'm probably looking at around 2 years before I would expect to need it. 

I've also been looking at PSA & CSAV.


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## AltaRed (Jun 8, 2009)

Minimum holding in a bond fund should equal the duration of the fund. Old article but the principle remains the same Holding Your Bond Fund for the Duration | Canadian Couch Potato

Plus market price volatility of bond funds is related to duration. A 1% interest rate change would change bond fund market price by the rate change x duration, e.g. a 1% change would result in a market price change of 7% for a bond with a 7 year duration.

If your holding period is 2 years, you can't afford the risk of a duration beyond about 2 years, e.g. XSB rather than XBB.


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## james4beach (Nov 15, 2012)

l1quidfinance said:


> Tangerine HISA offer just expired so I'm parking a little cash now back in EQ and Happy Savings at 1.25%
> Gics almost pointless given the fact you are locking the money in.


GICs may be useful if laddering them gives you enough liquidity for your needs. A ladder of 5-year GICs will consistently get you better-than-cash yields, while still giving you some access to cash as the GICs mature.

Many of us around here have GIC ladders with tight spacing, perhaps every 3 or 6 months. Even though most of the money is locked in, some becomes available every few months, which is good enough for me.



l1quidfinance said:


> Where would something like XBB play into the mix. Granted you are adding market risk into the equation. What would you use as the minimum hold period for XBB.


As @AltaRed says the key issue is your time horizon, and the fund's average maturity. You should only hold XBB if your time horizon is > 10 years. The price can fluctuate pretty dramatically in shorter time frames.

My minimum hold period for XBB would be 10 to 15 years. This is a long term investment, and I hold it in my RRSP for this reason.



l1quidfinance said:


> For this specific tranche of cash I'm probably looking at around 2 years before I would expect to need it.


That's a very short time horizon. I would stick with high interest savings accounts & credit unions (cash). XSB would also work, but you'll probably get a higher return in a high-interest savings account since XSB's yield to maturity is only 0.83%. PSA is a fine alternative, but yields even less at only 0.57%

I think the best options for a time horizon of 2 years are high interest savings (which can get 1.1% or higher) and maybe XSB


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## agent99 (Sep 11, 2013)

You could check with m3S in the Celsius thread. He makes fun of those looking at 1-2% yields. 8% at least, his way. Mind you, I have no idea what he is talking about


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## AltaRed (Jun 8, 2009)

FWIW, I believe this article on Inequality, Interest Rates, Aging and the Role of Central Banks is worth reading. The conclusion I get is that aging demographic and slowing population growth will keep GDP growth lower than the past for a very long time... and inflation will be tame long term due to unused production capacity. That means... get used to puny rates of return on fixed income for potentially a generation or more.


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## Tostig (Nov 18, 2020)

I got money in zhy.to. It's a high yield US corporate bond fund hedged to the cad.

It currently pays 0.06 each month. At the current price of $13.25, its yield is over 5%. Plus, if you have a BMO Investorline account, it doesn't charge commission.

Volume is low. Price doesn't fluctuate that much but having just stated that, its pre-pandemic high was over $14 and the pandemic low was $9.43.


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## james4beach (Nov 15, 2012)

Tostig said:


> I got money in zhy.to. It's a high yield US corporate bond fund hedged to the cad.


Beware, these are junk bonds, and the yield to maturity is 4.1%, not over 5%. The credit grade of the paper contained within it is quite poor. During the covid crash, ZHY was down 30% at one point, giving you a sense of the risk.

A balanced fund portfolio (60% stocks 40% bonds) is a superior investment to ZHY, and it can be shown numerically. Here's a comparison of XBAL versus ZHY.

ZHY has returned 4.97% annually, with a sharpe ratio of 0.57
XBAL has returned 6.71% annually, with a sharpe ratio of 0.98 <-- a much better deal

@Tostig would you consider switching to XBAL ? Take a look at those charts and you'll see how similar the two are. This is because junk bonds behave somewhat like stocks, so you really do have stock exposure, perhaps without realizing it.

You are better off holding XBAL, or another diversified balanced fund. The 60/40 balanced fund has a far superior risk-adjusted return.

It's actually "no contest" in this comparison. You can see that ZHY (junk bonds) have been much more volatile than XBAL.


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## like_to_retire (Oct 9, 2016)

james4beach said:


> Beware, these are junk bonds, and the yield to maturity is 4.1%, not over 5%. The credit grade of the paper contained within it is quite poor. During the covid crash, ZHY was down 30% at one point, giving you a sense of the risk.


Yeah, when I see people reach for yield with junk bonds, and especially when that super high risk can result in complete loss of principle, then I don't see why they wouldn't simply buy some Enbridge Inc. stock with a growing dividend of 6.7%.

Do they feel junk bonds are less risky? And don't forget the dividend tax credit.

ltr


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## Covariance (Oct 20, 2020)

l1quidfinance said:


> Given the woeful rates where do we put cash at the minute? This doesn't need to be risk free but should be free from credit risk unless we go into complete Armageddon.


Interested if you could elaborate on the risk you are prepared to take and when you require access to the cash. I say this because it will inform recommendations. Elaborating a bit - when you specify that it does not need to be risk free but free from credit risk you are essentially saying you will only consider government or government backed investments. Not sure if that’s exactly what you meant but perhaps you can confirm.


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## l1quidfinance (Mar 17, 2017)

Some great responses here. Many typical of what I would expect of this great CMF community.

GICS are 100% out of the equation as I would ideally like the money in my IB account and in truth I do want to play a little. 

My thought was a product that is relatively safe and I was referring to safety more in terms of credit risk than interest rate risk. 

So the thought process is a little like this but it does divert from the core thread title. 

Buy XBB / XSB or similar in IB non registered acc.
Sell GLD OTM Put to create a 4%ish yield from the premium. The bond portion to act as a safety net should the put be assigned and earn some income.
If assigned sell ATM call. Continue selling calls until exercised and then start off the process again selling puts. 

Granted there are many products probably of a similar ultimate risk profile and yield. ZPAY comes to mind. I feel the risk is reduced significantly when compared to junk bonds yet the final yield achieved would be almost the same.


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## Covariance (Oct 20, 2020)

l1quidfinance said:


> Some great responses here. Many typical of what I would expect of this great CMF community.
> 
> GICS are 100% out of the equation as I would ideally like the money in my IB account and in truth I do want to play a little.
> 
> ...


It's an interesting trade that I will ponder on. What does your broker require in terms of margin, cash to write the put?


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## l1quidfinance (Mar 17, 2017)

It looks like it ties up about 35% of the trade value in margin. Of course there is no interest payable so long as it is not assigned. In which case if assigned the margin interest is currently 1.653%

So in this case selling a sept 10th 163.50 would get you 4.2% annualized after trading fees and would hold $5677 of available margin.

The margin is based on 1 contract.


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## Covariance (Oct 20, 2020)

l1quidfinance said:


> It looks like it ties up about 35% of the trade value in margin. Of course there is no interest payable so long as it is not assigned. In which case if assigned the margin interest is currently 1.653%
> 
> So in this case selling a sept 10th 163.50 would get you 4.2% annualized after trading fees and would hold $5677 of available margin.
> 
> The margin is based on 1 contract.


What's the maintenance margin?


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## OneSeat (Apr 15, 2020)

james4beach said:


> A balanced fund portfolio (60% stocks 40% bonds) is a superior investment to ZHY,* and it can be shown numerically*. Here's a comparison of XBAL versus ZHY.


James - to me that chart shows three things - *not just one* - 
-1- for 3+ years ZHY did better than XBAL
-2- for 4 years they were equal - with some more volatility for ZHY but still equal
-3- for 1 year XBAL did better - then (the last 18 months) it did way better.

But to me and to many that is the big question - why has the equity market been so fantastic - and will it continue?


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## AltaRed (Jun 8, 2009)

Remember VBAL is a 60/40 balanced fund so not all equities.

The article in post #5 tells you why equities have performed and will continue their momentum and why fixed income will languish for the longer term. Declining birth rates and aging demographics will keep the lid on consumer demand, GDP growth and thus inflation. Central banks will have no choice but to keep interest rates low in an attempt to stimulate GDP growth which is how the politicians* believe will magically solve sovereign debt/GDP ratios and balance budgets. Equities (asset inflation) are where the action will be at through the foreseeable future.


* Trudeau doesn't care about monetary policy nor balanced budgets. O'Toole thinks 3% compounded GDP growth will balance the budget. Repeat this scenario throughout OECD countries and you can see where this is going.


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## Fain (Oct 11, 2009)

agent99 said:


> You could check with m3S in the Celsius thread. He makes fun of those looking at 1-2% yields. 8% at least, his way. Mind you, I have no idea what he is talking about


I earn 12% on both CAD & USD with Crypto.com. Not going to last at those rates with the amount of institutional money going into crypto.


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## james4beach (Nov 15, 2012)

AltaRed said:


> Central banks will have no choice but to keep interest rates low in an attempt to stimulate GDP growth which is how the politicians* believe will magically solve sovereign debt/GDP ratios and balance budgets. *Equities (asset inflation) are where the action will be at through the foreseeable future.*


That sounds logical, but is still a prediction, and hardly guaranteed. Analysts have differing opinions on this.

There are some who say that all the central bank liquidity and stimulus will keep pushing up equities. But other analysts say that the US market has hit such crazy high valuations that it virtually guarantees poor equity performance going forward.

Myself, I still think bonds are useful for portfolio diversification. The US CAPE is now virtually at the dot com bubble high. What if stocks perform terribly going forward? I would hate to concentrate my bets entirely in stocks.

More importantly though I think it's a losing battle to predict market directions in the short / medium term. The world is an unpredictable place. I'm sticking with my original portfolio construction as per my asset allocation plan... no modification to my strategy. That means I still have 50% bonds and GICs.


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## Jimmy (May 19, 2017)

If you are holding the assets for 3 yrs, an idea is a mix of Emera and ZPR or any PS or PS ETF (-ve correlation) . Lowest return was 1.31 %, avg is 7.8%.

Bonds and GICs have -ve real returns now and are pointless. Will be worse if int rates rise, ( they can't get much lower) .


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## james4beach (Nov 15, 2012)

Jimmy said:


> Bonds and GICs have -ve real returns now and are pointless.


The point of them is to prevent your portfolio from imploding, if there's a market shock or weakening in stocks.

Preferred shares, looking at CPD since inception have a reasonably strong 0.62 correlation with the TSX so you're missing out on portfolio diversification. If stocks implode, then preferreds would implode as well (as you saw in 2020 by the way).

If you want to invest entirely in equities, be my guest, but you'd better hope and pray that stocks don't ever have a serious bear market.

Here is a chart of ZPR compared to XIC, the TSX index. I hope you aren't under the misconception that preferred shares offer diversification or safety.

ZPR actually fell more than the TSX index during the 2020 crash!


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## Covariance (Oct 20, 2020)

Interestingly ZPR.TO also has a 0.64 correlation with the Barclays High Yield Bond Index (JNK)


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## Jimmy (May 19, 2017)

james4beach said:


> The point of them is to prevent your portfolio from imploding, if there's a market shock or weakening in stocks.
> 
> Preferred shares, looking at CPD since inception have a reasonably strong 0.62 correlation with the TSX so you're missing out on portfolio diversification. If stocks implode, then preferreds would implode as well (as you saw in 2020 by the way).
> 
> ...


Not talking about PS alone. The combo is only .5 correlated to the market.

And again if you are holding for 3 yrs it has never lost $ and the worst yield is about the same as the current yield on ZAB.

It is up to you if you want to diversify and lose $ or make some actual $ from your investments. I would rather make some $. I would only look at bonds if I was in my late 60s nearing retirement.


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## james4beach (Nov 15, 2012)

Covariance said:


> Interestingly ZPR.TO also has a 0.64 correlation with the Barclays High Yield Bond Index (JNK)


It's probably because both have an equity linkage. Junk bonds also behave like equities.

One has to be careful when designing a diversified portfolio. The reason for choosing distinct asset classes is that they fundamentally behave differently. But some assets -- like junk bonds and prefs -- have some crossover with equity behaviour and only offer partial diversification benefit.

Throwing together a bunch of equities, which *happen* to have low correlations with each other in the past, may not be a robust way to achieve diversification.


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## like_to_retire (Oct 9, 2016)

james4beach said:


> One has to be careful when designing a diversified portfolio. The reason for choosing distinct asset classes is that they fundamentally behave differently.


So often I read someone who is quite proud that they have a reasonable asset allocation, and then they go out of their way to fill the fixed income portion with preferred shares and high yield bonds. They would be far better off just buying 100% equities, as the end result would likely be better. The point of fixed income is often missed.

ltr


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## james4beach (Nov 15, 2012)

GIC rates have gone up quite a bit over the last couple months.

Today at my discount brokerage, I'm seeing 5 year GICs from Presidents Choice Bank at 2.4%

That's quite a bit higher than GICs at my credit union, and usually my credit union has one of the best rates.


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## Gator13 (Jan 5, 2020)

james4beach said:


> GIC rates have gone up quite a bit over the last couple months.
> 
> Today at my discount brokerage, I'm seeing 5 year GICs from Presidents Choice Bank at 2.4%
> 
> That's quite a bit higher than GICs at my credit union, and usually my credit union has one of the best rates.


If the BoC increases rates next year as predicted, what affect will this have on GIC rates and HISA rates?


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## AltaRed (Jun 8, 2009)

Gator13 said:


> If the BoC increases rates next year as predicted, what affect will this have on GIC rates and HISA rates?


HISA rates go up. 5 year GICs may not move at all, i.e. they are more highly correlated to GoC5 bond yields. Lesser terms, such as 1 year GICs could be expected to move almost as much as HISA rates.

IOW, overnight short term rates influence the short end of the yield curve. Much less so 5 and 10 year bonds. 10 year bond yields could actually decrease on the premise that inflation will be brought under control. The market decides on longer term rates, not the Central Bank.


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## james4beach (Nov 15, 2012)

AltaRed said:


> IOW, overnight short term rates influence the short end of the yield curve. Much less so 5 and 10 year bonds. 10 year bond yields could actually decrease on the premise that inflation will be brought under control. The market decides on longer term rates, not the Central Bank.


Yes and it's worth emphasizing that the 5 year GIC rate could remain stable, or even go down, even as the Bank of Canada raises rates (which itself is not certain).

Future GIC rates are impossible to predict. For this reason, the best approach is a GIC ladder where you routinely keep buying new 5 year GICs on a steady schedule.

Add to the story the unpredictability of Bank of Canada rate decisions, and nobody has any clue where GIC rates will be in 2022 or 2023.


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