# Buying individual bonds



## gibor365 (Apr 1, 2011)

So far I was buying only bonds ETFs, and was thinking maybe it worth to consider buying individual bond for FI part of portfolio. Was wondering if anybody buying individual bonds and what criteria uses to do so?

I went to bond section of my CIBC IE account and searched by bonds that have investment grade rating (at least BBB) and highest yield.
2 first I found:
1. Ussuer: CAMECO CORP 
Coupon: 4.19% 
Maturity: Jun 24, 2024 
Type: Bond Class: Mid Term Note 
Credit Rating: BBB(high) 
Payment Frequency: Semi-Annual 
Instrument Currency: CAD 
Yield: 3.87% Semi-Annual,
3.907% Annual 
Face Value: $5,000.00
Price (Per 100): $101.9244 
Accrued Interest: $18.37 
Estimated Cost: $5,114.59 
Settlement Date: Jul 26, 2017
and
2. Issuer: HUSKY ENERGY INC 
Coupon: 3.6% 
At Maturity: Mar 10, 2027
Type: Bond 
Class: Corporate 
CUSIP #: 448055AN3 
Credit Rating: A(low) 
Payment Frequency: Semi-Annual
Instrument Currency: CAD 
Yield: 3.673% Semi-Annual, 
3.707% Annual 
Face Value: $5,000.00 
Price (Per 100): $99.4092 
Accrued Interest: $68.05
Exchange Rate: 1.0 
Estimated Cost: $5,038.51
Settlement Date: Jul 26, 2017

I don't understand some numbers, for example , what is Accrued Interest or Coupon? 
Generally which one of those 2 is better valued right now?
I understand that for Cameco bond , I gonna get semi-annual dividends = 5000 x 3.87% = $193.5 regardless of the bond price? Correct?
and because my Estimated Cost: $5,114.59 , the actual current yield is 193.5/5114.59 = 3.78%?

Now, what gonna be at Maturity: Jun 24, 2024? Bond will be automatically sold? At what price?

Can you recommend any articles/books/blogs to understand how to buy "correct" bond?


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## Eder (Feb 16, 2011)

Accrued interest is added to the price of the bond at purchase...coupon is the interest rate at issue date. I don't like to buy bonds at above par and I dont like either of these bonds.

Phone CIBC & get a quote on Home Capital Group bonds...they are trading a bit below par ~$98 and are yielding decent. Although their rating took a hit I would feel less at risk compared to a miner or oil company.

When your bond matures you get your face value back incurring a capital gain or loss depending on your purchase price.You will also pay a bit of juice to CIBS when you sell. If you want to buy over 25k or so phone IE trading desk for best quotes.


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## like_to_retire (Oct 9, 2016)

Gibor365 said:


> I don't understand some numbers, for example , what is Accrued Interest or Coupon?


Note that bonds are generally purchased in units of $1000 with a minimum of $5000, but they are sold in relation to $100 per $100 at a premium (more than $100) or discount (less than $100) depending on the coupon interest rate, and time to maturity, considering present day interest rates. When issued, they owe the holder interest (the coupon) at agreed intervals (i.e. semi-annual), and upon maturity to repay the principal. So if you paid $5114.49, you will receive $5000 at maturity plus the final interest.

A bond pays its coupon, not it's yield. So, the Cameco bond will pay its coupon of 4.19%. But you paid $101.9244 for every $100 of principal that will be returned to you at maturity, so the yield will be lower than its coupon of 4.19%. It calculates to 3.907% total return (use a bond calculator program or trust the brokers information). That's what they call a premium bond as opposed to a discount bond (the Husky bond where the PAR price will be lower than $100) - lots to learn about that with respect to taxation in non-registered accounts. I won't go into it here as you didn't specify if it was registered or non-registered - it makes a rather large difference. 

Also note that when pricing a bond, the discount brokers usually default to $5000 purchases. You'll find the price break points (at least at TDDI) are at 10K, 20K, 30K, 50K, 75K, 100K, 250K. The biggest break is at $10K and the next biggest at $20K. So your sweet spot would be to purchase at least $20K bonds. Anything less and you should stick to ETFs.

The accrued interest is paid to the seller at time of sale making up for the interest that has built up since the last coupon, up to the time of sale, and is part of the next coupon that you will receive, so they want that money back from you at sale time. Note that the accrued interest amount paid should be deducted from the first coupons’ income reported (with respect to taxes) in the year that the first coupon is paid after purchase as a carrying charge.



Gibor365 said:


> I understand that for Cameco bond , I gonna get semi-annual dividends = 5000 x 3.87% = $193.5 regardless of the bond price? Correct?
> and because my Estimated Cost: $5,114.59 , the actual current yield is 193.5/5114.59 = 3.78%?


Current or Running Yield = coupon rate / price paid
So Cameco bonds current yield = 4.19% / 101.9244 = 4.11%
But the current yield is rather useless and doesn't consider capital gain or loss. You need to use Yield to Maturity.

Yield to Maturity is basically = (coupon rate + gain or loss per year) / price paid, where gain or loss per year is PAR, minus price paid, divided by time to maturity. Note that this formula is not completely accurate. It's a simple and close approximation formula. The exact formula assumes that the Yield to Maturity has its coupons reinvested at the YTM rate to end up with the advertised YTM. So, I could go through the math but as I said, you can simply trust the brokers YTM as posted that day.	

Again, which bond is better is completely dependent on whether it's in a registered account or not. 

ltr


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## james4beach (Nov 15, 2012)

I don't think it's a great idea to buy individual corporate bonds unless you have such a large portfolio that you can diversify your issuers and get good prices (meaning at least 10K purchases). For example to get down to a reasonably low 5% single issuer exposure, you'd need a 200K portfolio of corporate bonds.

Individual bonds make sense if you're sticking with government bonds, because then you don't have to worry about single issuer exposure.

That Cameco bond -- you're getting 3.9% yield to maturity, but it's not clear if that is after commissions/fees are included. Check how much they charge for the bond purchase, and whether the YTM is quoted after the fee. It varies between brokerages.

Also beware that Canadian corporate bonds have poor liquidity. If we go through a credit crunch, you could see sharp decreases in their value. Bonds are traded directly with your brokerage, not with the broad market like stocks are. This means you could see your bond become completely illiquid. Basically, if the broker doesn't have any interest in buying it from you, *there is no price for the bond* and your holding could become totally illiquid.

Additional tax note ... the coupon payments are "interest income" for tax purposes, like bank account or GIC interest. At the maturity date, there is also a capital gain or loss depending on the initial purchase price of the bond. The "yield to maturity" takes into account both of those effects.

In a non registered account, you will want to minimize the coupon size, because coupons are the most highly taxed interest income. Between your two options, the Husky bond has the lower coupon and would be better for a non registered account.

I have a non registered account where I hold individual government bonds, and always choose the lowest coupon ones I can find. This minimizes the heavily taxed interest income. ZDB is an ETF that uses the same strategy.


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## like_to_retire (Oct 9, 2016)

gibor365 said:


> So far I was buying only bonds ETFs, and was thinking maybe it worth to consider buying individual bond for FI part of portfolio. Was wondering if anybody buying individual bonds and what criteria uses to do so?


I've purchased individual bonds for many, many years. I feel I understand them (as they're fairly complicated).

Something happened about six years ago, and GIC yields started to better individual bond yields in the five years and lower time frame. I used 5 year ladders exclusively, so I started to pay attention. 

It finally became a matter of how much I was willing to pay for the liquidity of a bond for my ladders. The GIC won that argument, and I started to transition my ladders over to GIC's from bonds, and have now for a few years exclusively used GIC's - I now own no bonds. 

Any terms for fixed income that I want over five years, I use preferred shares. I have no individual bonds any more as GIC's are a far better deal.

ltr


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## fatcat (Nov 11, 2009)

like_to_retire said:


> I've purchased individual bonds for many, many years. I feel I understand them (as they're fairly complicated).
> 
> Something happened about six years ago, and GIC yields started to better individual bond yields in the five years and lower time frame. I used 5 year ladders exclusively, so I started to pay attention.
> 
> ...


+1 from me ... i like the liquidity of bonds but a mix of hisa's, gic's and bond funds seems to work best for me

corporates under 5 years just aren't paying enough to offset the liquidity advantages

though i wish tdw had a better selection of gic's ... leaving the reservation to buy gic's from brokers creates a real hassle for those of us who have to file usa tax returns and pushes us toward bond funds


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## lonewolf :) (Sep 13, 2016)

History shows government debt is the worse debt. There has been countless government defaults & partial defaults throughout history. In the few cases of corporate default you receive a payout after liquidation. With government debt you have something to frame & that is all. Government debt is unsecured & since they have the guns & the armies, you can not force them to pay anything. Do not believe in the propaganda that government bonds are safe. Do research the research will show AAA corporate is the safest. The government keeps going deeper in debt year after year like governments before them in other countries they have no intention of ever paying back. Government debt is in a huge bubble the interest is not worth the risk


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## Eder (Feb 16, 2011)

BCRIC anyone? lol


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## agent99 (Sep 11, 2013)

like_to_retire said:


> I've purchased individual bonds for many, many years. I feel I understand them (as they're fairly complicated).
> 
> Something happened about six years ago, and GIC yields started to better individual bond yields in the five years and lower time frame. I used 5 year ladders exclusively, so I started to pay attention.


I too have bought individual bonds for a long time, always in registered accounts. 

I guess it depends on which bonds you compare with GICs, but I have done exactly the opposite. I used to have a GIC ladder, but now only have corporate bonds. I try to earn as close as possible to the SWR, and 2% for a GIC doesn't cut it. No doubt my risk is higher, but never have had a BBB bond fail. 

Right now, supply of bonds that match my needs at BMOIL is limited. As a result I have bought some convertible debentures. Yields in the 4-6% range for 3-5 years to expected call date. Like bonds and pfds, need to understand. I don't know enough about pfds, so own hardly any.


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## gibor365 (Apr 1, 2011)

> Again, which bond is better is completely dependent on whether it's in a registered account or not.


 It's for registered account only. J. Hymas told me that for registered better to buy bonds than pref .

What I still don't understand , how is Coupon rate linked to Yield


> Coupon: 4.19%
> Yield: 3.87% Semi-Annual,
> 3.907% Annual





> Do not believe in the propaganda that government bonds are safe


 I don't


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## james4beach (Nov 15, 2012)

gibor365 said:


> What I still don't understand , how is Coupon rate linked to Yield


Maybe I shouldn't be trying to explain this while sleepy, but I'll take a stab at it --

Start with the concept of annual rate of return. You can always calculate this by knowing the starting value, ending value, and length of time. ((final value) / (starting value)) ^ (1/years) - 1 ... that's the same *annual rate of return* calculation you'd use for anything else, like stocks.

So that's what we're all after... what is our annual rate of return, aka yield to maturity?

To calculate this rate of return, you need to know the ending value of something. For bonds, think of: "how much total money do I end up with by investing in this bond?". Say there's a bond that matures in 10 years, with a 5% coupon and $100 face value. The coupon payments are regular payments of $5 a year.

How much total money do you end up with by investing in this? (To simplify this I am ignoring the time value of money). You receive 10 x $5 coupons + $100 face value = $150 by the time the bond matures.

By investing in this bond, you end up with $150 in cumulative terms: all coupons + maturity value.

For example perhaps you only spent $100 to get the bond. Now you can answer the critical question, the annual rate of return = Yield to maturity = (150/100)^(1/10) = *4.1%*

Just like with stocks... that means you put $100 to work and it returned 4.1% annually... and you end up with $150 (in cumulative terms, at maturity time).

The bond always pays its coupon rate like clockwork; it's an intrinsic feature of the bond at the time it's issued. However what *yield* someone gets will completely depend on their purchase price and how much time remains on the bond.

This is complicated by the time value of money, which is why everyone uses bond calculators to figure out yield. For example over 10 years of getting $5 coupons, you actually end up with more than $50. The first coupon payment for example grows in value over the next 9 years due to time value of money. So the final pot of money is more than $150.


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## GreatLaker (Mar 23, 2014)

gibor365 said:


> What I still don't understand , how is Coupon rate linked to Yield


Coupon is the interest the bond pays compared to its par value. Yield is the interest rate the bond pays compared to its price. Coupon and yield are related through the price of the bond compared to its par value.

When a bond is issued, its price will be the same as its par value. So its yield is the same as its coupon. Say a $1000 bond that pays 5% interest, then coupon = 5% and yield = 5%.

But bond prices change with interest rates. So if interest rates rise after the bond is issued, the price will drop. That's known as a discount bond. If you purchase a bond in the resale market, and and interest rates have gone up since it was issued, you will buy the bond at a discount price (i.e. lower than par value). The coupon will always be 5%, but the yield to maturity will then be >5%. If you hold it to maturity, when you redeem it you will get a capital gain. The opposite is true if interest rates drop.

Since interest rates have dropped so much over the past 3 decades there are a lot of premium bonds in the market. 

http://www.investopedia.com/university/bonds/bonds3.asp

http://www.investopedia.com/terms/b/bond-yield.asp


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## like_to_retire (Oct 9, 2016)

gibor365 said:


> What I still don't understand, how is Coupon rate linked to Yield


I've been thinking about your conundrum. Your question has been answered several times in this thread, so I guess I'm having difficulty understanding what you don't get.

You've been around long enough that I think you must surely understand the yield of any investment, so perhaps your stumbling block is coupon rate? Let me explain.

Most bonds today are issued electronically in certificate form, but originally a bond was a piece of paper, worth a certain face value when issued at PAR, and attached to it were coupons. These were detachable pieces of paper that represented the interest payments due to the bondholder, and had a maturity date printed on them (i.e. every six months). You detached the coupon from the certificate and took that coupon to the bank on or after it's maturity date and you collected your interest payment. This continued until all the coupons were ripped away and only the certificate remained. You took that certificate to the bank and they gave you the face value. Today, nothing has changed in reality except it's all electronic now.

When that certificate is issued today it has a face value and a coupon rate. The coupon rate is paid to the holder at each coupons maturity date. When the coupons are all gone at the maturity date, they give you the face value. All done.

Get it?

But, and here's the rub, if you buy that bond (over the counter) later than the issue date, some of the coupons may have already been clipped, and (more importantly) the interest rates of the day have changed, so the price will not be $100 for every $100 of face. If the bond was issued at 4%, and interest rates (for a similar term left on the bond) are now 3%, you're going to pay more than $100 for that bond, since the coupons that you'll clip until maturity will still be paying 4% (that never changes). The counter will want more for that bond than $100 on $100 of face. So if there was 5 years left on that bond, they'll want to charge you $104.61 for that bond. The yield will be 3% annualized, but the coupon paid every 6 months is still 4% annualized.

Get it?

ltr


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## james4beach (Nov 15, 2012)

I had trouble really understanding bonds until I took a basic accounting course (standard Intro to Accounting at university). Drawing out the cashflow series and understanding present value and future value really explained a lot. That doesn't come up much with stock investing, but it's critical to understanding bonds.

gibor, you might want to look into taking such a university course. The course should also cover financial statements (balance sheet, income statement, cashflow statement, equity statement) as well as key concepts like discount rate, present value, future value, etc. Or you could find such a free course online -- that would really be worth the time investment.

I know you're a fixed income focused investor and it's really in your best interest to get a deep understanding of these accounting topics. It will also help protect you from getting ripped off.


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## gibor365 (Apr 1, 2011)

> Get it?


 got it , thanks 

So, for buying bonds into registered account, what are cons and pros of 2 issues I mentioned in the 1st post?

P.S. generally, I'm OK with 4% yield with liquid bond (I understand that if I sell it earlier , I gonna get accured interest too), esp considering that the best 5 y GIC in IE has only 2.3% interest.
I was thinking to create corp bond letter, buying bond every year from different sector


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## like_to_retire (Oct 9, 2016)

gibor365 said:


> got it , thanks
> 
> So, for buying bonds into registered account, what are cons and pros of 2 issues I mentioned in the 1st post?


Well, premium or discount matters not in a registered account. With these two bonds, there's nothing really to prefer one over the other, given their attributes, rather, you have to establish what you want in relation to term and ratings. It's up to you.

Cameco has 6.9 years left to maturity, while the Husky has 9.6 years to maturity. A huge difference. Decide what you're looking for in the term.

Cameco is BBB(high), while Husky is A(low). Another difference. Decide how much risk you're willing to take.



gibor365 said:


> I understand that if I sell it earlier...


Wait!!!!! NO, NO, NO. Have you looked at the spread? The only sane way of buying bonds is to hold to maturity. Selling OTC for the retail buyer is crazy. You'll get your shirt handed to you on a platter.

ltr


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## james4beach (Nov 15, 2012)

like_to_retire said:


> Wait!!!!! NO, NO, NO. Have you looked at the spread? The only sane way of buying bonds is to hold to maturity. Selling OTC for the retail buyer is crazy. You'll get your shirt handed to you on a platter.


Corporates, yes absolutely -- you should hold them to maturity.

Government bonds though have tight spreads even for retail and can definitely be sold.


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## like_to_retire (Oct 9, 2016)

james4beach said:


> Corporates, yes absolutely -- you should hold them to maturity.
> 
> Government bonds though have tight spreads even for retail and can definitely be sold.


Sure, but you'll lose money. The spreads aren't that tight such that I would be willing to sell for anything but an emergency. And that's what liquidity of bonds is all about. It gives you the option to get out, but don't expect anything great. Tell me, james4beach, have you ever sold a government bond? No, because it's only for emergencies where you're willing to lose your shirt. Don't encourage the crazies... please....

ltr


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## james4beach (Nov 15, 2012)

I've never had an emergency that I couldn't cover with my chequing account, but yes I would absolutely sell my govt bonds in case of a big emergency, especially those with few years left on them.

Have you actually looked at these spreads? The 2023 govt bond in my portfolio has bid 99.281, ask 99.336. That's an incredibly tight *0.06% bid/ask spread*. This has gotten tremendously better over the last decade. I even put in test orders to confirm that they will trade at those quotes.

It's absolutely liquid and can easily be sold if needed. You're basically only paying the $25 trade fee, and there's nothing else lost.


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## like_to_retire (Oct 9, 2016)

james4beach said:


> I've never had an emergency that I couldn't cover with my chequing account, but yes I would absolutely sell my govt bonds in case of a big emergency, especially those with few years left on them.
> 
> Have you actually looked at these spreads? The 2023 govt bond in my portfolio has bid 99.281, ask 99.336. That's an incredibly tight *0.06% bid/ask spread*. This has gotten tremendously better over the last decade. I even put in test orders to confirm that they will trade at those quotes.
> 
> It's absolutely liquid and can easily be sold if needed. You're basically only paying the $25 trade fee, and there's nothing else lost.


James, rather than nit-picking my posts, wouldn't it be better to concentrate on trying to educate someone who doesn't understand the simple difference between yield and coupons of a bond? I've invested time into coming up with basic scenarios that the OP can understand in the complicated world of bonds. It would be great to have backup on that effort, instead of you trying to find a way to make my reasoning look bad.

Carry on James, you're in charge now of the education.

ltr


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## james4beach (Nov 15, 2012)

You're right, I got off track on the thread.


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## gibor365 (Apr 1, 2011)

> Wait!!!!! NO, NO, NO. Have you looked at the spread? The only sane way of buying bonds is to hold to maturity. Selling OTC for the retail buyer is crazy. You'll get your shirt handed to you on a platter.


I understand and don't intend to sell it unless it will be some real emergency (cannot think which one ). but still, in theory I can sell bond even in loss, but cannot sell GIC...



> Decide how much risk you're willing to take.


yes, this is my understanding... Cameco quality lower just by 1 notch, but it almost 3 y shorter duration and higher yield.
btw, how can I know when Cameco has next coupon payment? IE doesn't give me such info...


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## like_to_retire (Oct 9, 2016)

gibor365 said:


> btw, how can I know when Cameco has next coupon payment? IE doesn't give me such info...


If the maturity date of a bond is June 24, then the semi-annual coupon payments into your account will be June 24 and Dec 24.

ltr


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## fatcat (Nov 11, 2009)

gibor365 said:


> I understand and don't intend to sell it unless it will be some real emergency (cannot think which one ). but still, in theory I can sell bond even in loss, but cannot sell GIC...
> 
> yes, this is my understanding... Cameco quality lower just by 1 notch, but it almost 3 y shorter duration and higher yield.
> btw, how can I know when Cameco has next coupon payment? IE doesn't give me such info...


the global bond default rate difference between BBB and A over the last 3 reported years has been 0 

historically the difference is still very small ... BBB bonds are still considered investment grade

View attachment 15826


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## james4beach (Nov 15, 2012)

fatcat said:


> the global bond default rate difference between BBB and A over the last 3 years has been 0


But that misses the fact that BBB bonds get downgraded to lower grades before actual default.

The higher up the rating scale you are, the farther you are from default. If a company is A-rated, it takes many ratings cuts before they're in danger of defaulting. If you're at BBB, you are only a couple downgrades away. Downturns in a company's creditworthiness can often result in a quick series of credit downgrades.

What fatcat's table really shows is that credit rating agencies do a good job at rating credit risk. Something they rate as A hardly ever defaults.


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## birdman (Feb 12, 2013)

What fatcat's table really shows is that credit rating agencies do a good job at rating credit risk. Something they rate as A hardly ever defaults.[/QUOTE]

Ever since the the ABCP(Asset Backed Commercial Paper) debacle I really don't have much use for the credit rating agencies who gave the paper high ratings and then the paper became worthless as it could not be sold. Not sure what the end result was but as far as I am concerned the issuers, the Banks, and the credit rating agencies should have had their heads handed to them. I purchased $100,000. fairly short term (I think it was about 6-9 mos) and when I purchased it I really didn't know what it was. If I recall correctly the broker, Credential, answered my questions that it was bank paper secured by underlying debt and I think A or higher rated. Fortunately I needed some cash and sold 70,000. a month before the default. So, I was out $30,000. Then, surprisingly after about 6 mos Credential refunded the purchase for amounts under $100,000. Not sure what the end result was but lots of individuals and businesses had short term money parked there which they could not access and nobody was liable for the losses. Somehow the rating agencies escaped unharmed.


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## lonewolf :) (Sep 13, 2016)

Instead of individual bonds could go with target date bond fund. Risk spread out over more then one bond fund matures on a given year


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## gibor365 (Apr 1, 2011)

lonewolf :) said:


> Instead of individual bonds could go with target date bond fund. Risk spread out over more then one bond fund matures on a given year


I know only RBC target date bond fund and they are extremely illiquid. Any other issuers?


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## agent99 (Sep 11, 2013)

Gibor,
I have about $100k in cash in RRIFs looking for a home. I had been looking at the 2022 Cameco bonds, but the 2024 fitted better into our bond ladders (Bit longer than I wanted, but other rungs already have most of what BMO are offering. So just bought some. Order slip below shows details. About 4% yield to maturity. Still trying to decide what to do with rest of funds. May put some in balanced funds like TDB622 and let them choose the fixed income


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## gibor365 (Apr 1, 2011)

agent99 said:


> Gibor,
> I have about $100k in cash in RRIFs looking for a home. I had been looking at the 2022 Cameco bonds, but the 2024 fitted better into our bond ladders (Bit longer than I wanted, but other rungs already have most of what BMO are offering. So just bought some. Order slip below shows details. About 4% yield to maturity. Still trying to decide what to do with rest of funds. May put some in balanced funds like TDB622 and let them choose the fixed income
> View attachment 15850


When I enter same order, I get a bit different numbers


> Yield: 3.957% Semi-Annual, 3.996% Annual Face Value: $20,000.00 Price (Per 100): $101.3955 Accrued Interest: $75.76 Estimated Cost: $20,354.86 Settlement Date: Jul 27, 2017


Why numbers are different? On IE I have higher Price and Cost and a bit lower interest...
P.S. Estimated cost Includes a commission of $20.00
P.P.S. I also have a not on the screen


> Dealer firm remuneration may have been added to the price of this security (in the case of a purchase) or deducted from the price of this security (in the case of a sale). If remuneration has been added, it would be addition to any commission that may have been charged to you.


 How much can be this commission?

Also, do you create ladder buying bond from different sectors?


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## agent99 (Sep 11, 2013)

I don't know how your broker does their calculations, but main reason for difference is the bond price in your case is slightly higher. The total price in my case includes $200 commission. I don't know what the $20 you mention covers. But overall, just a slightly higher total price than I bought for. As a result annual/semi-annual yields are slightly lower. The coupon rate that you would receive is same (4.19% based on $20k face value). The estimated cost should include all commissions. Or at least it does at BMOIL. They now just have to tell you what it is.

Choice is not that great so can't be too picky about sectors. I go with companies that I think will be around at least to maturity date! BMO mark some offerings as HY and you have to call in to buy them. I avoid those and at present some/most REIT offerings.


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## AltaRed (Jun 8, 2009)

agent99 said:


> I don't know how your broker does their calculations, but main reason for difference is the bond price in your case is slightly higher. The total price in my case includes $200 commission.


BMO bond pricing $40+$1.50/1000, or discounted 20% if placed electronically (minimum $35). 

Scotia iTrade is much better at $1/1000 face value.... minimum $24.99 and max $250 where I do all my bond buys Most of my bond purchases are in the $25-30k range with a few higher.


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## agent99 (Sep 11, 2013)

AltaRed said:


> BMO bond pricing $40+$1.50/1000, or discounted 20% if placed electronically (minimum $35).
> 
> Scotia iTrade is much better at $1/1000 face value.... minimum $24.99 and max $250 where I do all my bond buys Most of my bond purchases are in the $25-30k range with a few higher.


That bmoil pricing is, I believe, for exchange traded bonds. Commission included in my recent bond purchase was $200 for twenty thousand face value. Seems Gibor's estimated cost included about same.


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## AltaRed (Jun 8, 2009)

Good grief! I've only paid $24.99-$30 for any of my bond purchases at Scotia iTrade as stated right on the Trade Confirmation slip. Good thing I don't buy bonds in my BMOIL account.


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## gibor365 (Apr 1, 2011)

AltaRed said:


> Good grief! I've only paid $24.99-$30 for any of my bond purchases at Scotia iTrade as stated right on the Trade Confirmation slip. Good thing I don't buy bonds in my BMOIL account.


On CIBC IE I found onlythat


> For purchases or sales of fixed income securities, CIBC Investors Services Inc and World Markets will receive remuneration based on the spread (i.e., the difference between the bid and offer prices on the security for the applicable marketplace). This spread will differ based upon various factors such as the nature and liquidity, face amount and term of the security. The amount charged will be disclosed pre trade and will be available on the trade confirms issued.


and


> Commissions for Fixed Income and Money Market Instruments are included in the price/yield, and will be disclosed on the order entry screen as well as on fixed income trade confirmations.


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## agent99 (Sep 11, 2013)

AltaRed said:


> Good grief! I've only paid $24.99-$30 for any of my bond purchases at Scotia iTrade as stated right on the Trade Confirmation slip. Good thing I don't buy bonds in my BMOIL account.


The commission is not the only factor. What you have to compare, is the total cost and the yield to maturity. My recent order was almost same, just marginally better than Gibor's. Maybe compare same bond purchase at Scotia and see how much better it is.


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## gibor365 (Apr 1, 2011)

agent99 said:


> The commission is not the only factor. What you have to compare, is the total cost and the yield to maturity. My recent order was almost same, just marginally better than Gibor's. Maybe compare same bond purchase at Scotia and see how much better it is.


Probably ,you are right....
When I did simulation on 20K face value, I got:


> Yield:
> 3.957% Semi-Annual,
> 3.996% Annual
> Face Value: $20,000.00
> ...


 and it was * that
Estimated cost Includes a commission of $20.00

No point to compare IE $20 commission vs agent's $200, as his total price was a bit better ...
Out of curiousity checked now how price affected by face value number.
so for 5K - price is 101.68
for 6K - 101.61
for 10K - 101.48
for 20K - 101.38 and same 101.38 for 100K


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## gibor365 (Apr 1, 2011)

> Maybe compare same bond purchase at Scotia and see how much better it is.


if you don't mind , check same bond for 20K at 12pm , so we can compare all brokerages


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## AltaRed (Jun 8, 2009)

That seems to be the typical model that I hear about. iTrade has disclosed its bond pricing commissions for at least a few years, if not more.


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## lonewolf :) (Sep 13, 2016)

gibor365 said:


> I know only RBC target date bond fund and they are extremely illiquid. Any other issuers?


 I think not best for trading buy & hold to maturity hedge against rising interest rates by bond fund maturing if held to maturity. The US market has more target date bond funds good to have some US currency in case of currency crisis in Canadian dollar. I have not looked to close to see whats out there in bond land more sitting on side lines well everyone else gets rich.


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## like_to_retire (Oct 9, 2016)

gibor365 said:


> if you don't mind , check same bond for 20K at 12pm , so we can compare all brokerages


It appears that some brokers break out the commissions and some don't, so it would be tough to compare pricing.

Consider, earlier in the thread where James quoted a spread on a government bond of: 

_The 2023 govt bond in my portfolio has bid 99.281, ask 99.336. That's an incredibly tight 0.06% bid/ask spread_

This must be without commission or the brokerage simply wouldn't make any money. I checked my TDDI account and looked up the 2023 govt bond in my broker and on $5000 it has a bid 98.276, ask 99.336. Quite a difference. This is $1.06 on $100 face or 1.06% round trip commission (buy and immediately sell). That's about the same as it's been for years and is quite a costly spread since the bond only pays 1.61942% after a year of holding it.

This high spread is a result of the commission being built into the pricing. But realize of course, you assign only half the spread to the buyer and half to the seller, so that drops the commission in half if you hold until maturity. I suppose this wouldn't be the case if the commission was broken out. I wonder if the total costs are the same though?

ltr


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## agent99 (Sep 11, 2013)

like_to_retire said:


> It appears that some brokers break out the commissions and some don't, so it would tough to compare pricing.


ltr, Alta seemed surprised at what appeared to be a high commission at BMOIL. It would not be hard at all to enter the same bond purchase at his brokerage and find out what the total purchase cost and resulting ytm would be for 20,000 of that same Cameco bond. 

Gibor and I have posted comparable total cost from two brokerages that are quite similar. If there are lower cost brokerages for bonds, I am sure many here would be interested. Hopefully Alta will post cost at his brokerage. Being a day or two later shouldn't make too much difference.

PS: Regarding pricing based on quantity - For this bond, price today at BMOIL is 100.7 regardless of whether you buy 10,000, 20,000 or 30,000. Commission is 1% of face value in each case. Today, total cost at BMOIL incl accrued interest and $200 commission is $20,218.06 for $20k face value.


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## AltaRed (Jun 8, 2009)

At iTrade, I see an Ask of $98.78 this morning on the 2023 Gov't bond. To buy $20k, cost would be $19,761.60 plus $46.85 accrued interest plus commission of $24.99


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## agent99 (Sep 11, 2013)

AltaRed said:


> To buy $20k, cost would be $19,761.60 plus $46.85 accrued interest plus commission of $24.99


Is that for the government bond? How about the Cameco bond so we can compare brokerages.


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## AltaRed (Jun 8, 2009)

That is for the Canada 2023 bond. iTrade lists only the 2019 and 2022 Cameco bonds.

The 2022 Cameco bond has an Ask of $99.871 as I type this. I am not certain, but I believe pricing can depend on what is in a broker's inventory as well, Scotia only has $25k in inventory for that Cameco bond...whereas on the Canada I quoted, they had about $250k in inventory best I remember. If Scotia is trying to clear out that Cameco listing, their Ask might be lower just to sell it.... or they may prize it and have a higher Ask. Hence I always look at the inventory for the maturity date range I want, and credit rating, and make a choice based on that.


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## like_to_retire (Oct 9, 2016)

AltaRed said:


> At iTrade, I see an Ask of $98.78 this morning on the 2023 Gov't bond. To buy $20k, cost would be $19,761.60 plus $46.85 accrued interest plus commission of $24.99


So, to compare apples to apples at TDDI, the following is for the same $20,000 fed government bond 2023 - remember there is no commission - it's in the spread. (BTW TDDI don't sell Cameco)

Buy ASK = 99.089 = $19817.80 + $46.85 = $19864.65 Total = (1.66411%)

Sell BID = 98.509 = $19701.80 +$46.85 = $19748.65 Total

Spread at $20,000 = 0.58% Total

ltr


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## AltaRed (Jun 8, 2009)

So Scotia is $31.41 only slightly less expensive. Same inning, never mind same ballpark. 

We'd have to look at a larger sample, especially corporates, to see the range of variations. Scotia has always been known for its bond desk (perhaps others too) so I don't know if they set the standard in the Canadian bond market or not. I simply buy so few bonds that I don't pay attention.


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## like_to_retire (Oct 9, 2016)

AltaRed said:


> So Scotia is $31.41 only slightly less expensive. Same inning, never mind same ballpark.
> 
> We'd have to look at a larger sample, especially corporates, to see the range of variations. Scotia has always been known for its bond desk (perhaps others too) so I don't know if they set the standard in the Canadian bond market or not. I simply buy so few bonds that I don't pay attention.


Yeah, I've always heard Scotia is best for bonds in pricing.

The TDDI bond with a $0.58 spread per $100 face would calculate to a commission to buy of $58 --- assigning half the spread to buyer [20,000 x (0.58/2)]

ltr


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## gibor365 (Apr 1, 2011)

> PS: Regarding pricing based on quantity - For this bond, price today at BMOIL is 100.7 regardless of whether you buy 10,000, 20,000 or 30,000. Commission is 1% of face value in each case. Today, total cost at BMOIL incl accrued interest and $200 commission is $20,218.06 for $20k face value.


InCIBC IE for 20K price is $20,266.08, $48 more expensive.... so unlike equities (where I pay 4.95 for trade), bonds in IE more expensive )

agent, does your price include accured interest?


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## gibor365 (Apr 1, 2011)

AltaRed said:


> At iTrade, I see an Ask of $98.78 this morning on the 2023 Gov't bond. To buy $20k, cost would be $19,761.60 plus $46.85 accrued interest plus commission of $24.99


so total 19,833?
CIBC gives total $19,823.05
I understand that $20 commissions included in the price


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## AltaRed (Jun 8, 2009)

gibor365 said:


> so total 19,833?
> CIBC gives total $19,823.05
> I understand that $20 commissions included in the price


I actually get $19827.84 when I add the math myself based on the 98.78 quote, but whatever it's close. Course if I bought 25,000, my commission would still be $25 ($24.99 minimum whether I buy $25k or $10k).

Did you include accrued interest of $46.85 in your CIBC quote?


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## gibor365 (Apr 1, 2011)

AltaRed said:


> I actually get $19827.84 when I add the math myself based on the 98.78 quote, but whatever it's close. Course if I bought 25,000, my commission would still be $25 ($24.99 minimum whether I buy $25k or $10k).
> 
> Did you include accrued interest of $46.85 in your CIBC quote?


Yes, I included 
The split is:
Price (Per 100): $98.8425 (include $20 commission), Accrued Interest: $46.85 Estimated Cost: $19,815.35 
Considering that price is fluctuating, we can say that it's about the same.....


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## agent99 (Sep 11, 2013)

gibor365 said:


> InCIBC IE for 20K price is $20,266.08, $48 more expensive.... so unlike equities (where I pay 4.95 for trade), bonds in IE more expensive )
> 
> agent, does your price include accured interest?


Yes it is the total transaction price - just like the record of my purchase I posted yesterday.


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## gibor365 (Apr 1, 2011)

agent99 said:


> Yes it is the total transaction price - just like the record of my purchase I posted yesterday.


So looks like some bonds can be a bit cheaper in one brokerage and others in other brokerage . it's like comparing RCSS vs Highland farm


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## agent99 (Sep 11, 2013)

AltaRed said:


> The 2022 Cameco bond has an Ask of $99.871 as I type this.


In order to make a comparison, we would need the *total transaction cost* and yield to maturity. BMOIL quote for the 2022 Cameco is attached below. Note that commission is lower than on the 2024 bond. It seems that the commission is graduated. I saw 0.5% for shorter term and 1% for the longer ones I looked at. This one is 0.8%. Quantity purchased also makes a difference. So for comparison purposes using $20,000 face value.


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## gibor365 (Apr 1, 2011)

CIBC IE doesn't offer 2022 Cameco , so cannot comment....

The only another bond that currently yields more than 4% is
Allied properties REIT 2025. It's trading below par.
Yield: 4.016% Semi-Annual, 4.056% Annual Face Value: $20,000.00 Price (Per 100): $97.4912 Accrued Interest: $195.25 Exchange Rate: 1.0 Estimated Cost: $19,693.49


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## AltaRed (Jun 8, 2009)

agent99 said:


> In order to make a comparison, we would need the *total transaction cost* and yield to maturity. BMOIL quote for the 2022 Cameco is attached below. Note that commission is lower than on the 2024 bond. It seems that the commission is graduated. I saw 0.5% for shorter term and 1% for the longer ones I looked at. This one is 0.8%. Quantity purchased also makes a difference. So for comparison purposes using $20,000 face value.


IF you insist, but my commission stays constant for orders up to $25k

Order Type:BuyQuantity:20,000 
Issuer: CAMECO CORPORATIONCUSIP:13321LAH1
Price Type:MarketPrice $:99.809 
Yield:3.789249
Quote as of: Jul 25, 2017 02:09:36 PM ET
Your Order Totals:
Estimated Principal Value $:19,961.80 CAD Estimated Commissions $:24.99 CAD Estimated Accrued Interest $:154.11 CAD Estimated F/X Rate:N/A Estimated Transaction Value $:20,140.90 CAD


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## agent99 (Sep 11, 2013)

AltaRed said:


> IF you insist,


Thank you! It would appear that there would be about $133 saving on that $20,000 order at Scotia. But likely not at CIBC based on Gibor's input. 

The rates you quoted earlier for BMOIL, which were in fact for Exchange Traded bonds (these include convertible debentures), are high compared with some other brokerages. I complained to BMOIL about that and they now just charge me same as equity trade. I will send them the comparison between Scotia and BMOIL for the Cameco bond and see what they have to say! With us getting older and interest rates starting to rise, we may very well be buying more bonds in near future.


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## AltaRed (Jun 8, 2009)

I suspect it may be a corporate decision for BMOIL not to undercut their Nesbitt Burns counterparts. BMOIL doesn't provide IPO offerings to their clients either (while others do) and I suspect it is for the same reason. 

FWIW, I have both BMOIL and iTrade accounts and like both. BMOIL wins on some things like USD RRSPs and as I understand it, Norberts Gambit execution (but have never done a NG either).


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## gibor365 (Apr 1, 2011)

> Thank you! It would appear that there would be about $133 saving on that $20,000 order at Scotia. But likely not at CIBC based on Gibor's input.


 $20 commissions in CIBC is pretty good


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## Belka (Apr 14, 2017)

I have never bought individual bonds before, but would now like to make a purchase for my Permanent Portfolio. The guidance is to buy 25-30 year Government bonds and sell them at the 20 year mark. When I go into my brokerage account, how do I differentiate between the different offerings?


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## like_to_retire (Oct 9, 2016)

You haven't specified if it's for a registered account or not. Makes a big difference since all the long term Canadas and provincials are premium bonds right now.

ltr


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## Belka (Apr 14, 2017)

Registered account (RRSP)


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## like_to_retire (Oct 9, 2016)

Belka said:


> Registered account (RRSP)


That's good, there will be no double taxation on the premium in a registered account. 

But, since all government bonds are at a premium now, you'll still be eating into your capital unless you plan on re-investing the premium portion of the yield.

You haven't specified what you're looking for, so it's hard to comment.

ltr


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## james4beach (Nov 15, 2012)

Belka said:


> I have never bought individual bonds before, but would now like to make a purchase for my Permanent Portfolio. The guidance is to buy 25-30 year Government bonds and sell them at the 20 year mark. When I go into my brokerage account, how do I differentiate between the different offerings?


Using individual bonds to make your own 'bond fund' is going to be very difficult. You have to do the same thing that the bond fund manager does, which means continuously buy new bonds, roll over the existing ones, monitor and maintain a constant average maturity.

I suggest that you buy a bond ETF. I know that the permanent portfolio says 20-30 year government bonds, but I've run the numbers and it seems to work equally well with a standard bond ETF (for example VAB). You might alternatively use *XLB* (long term bonds) but I think I tried comparing results before using both and found that *VAB* or *XBB* is best.


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## humble_pie (Jun 7, 2009)

AltaRed said:


> BMOIL wins on some things like USD RRSPs and as I understand it, Norberts Gambit execution (but have never done a NG either).



try it, you'll like it! especially when you need USD for a vacation


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## gibor365 (Apr 1, 2011)

Just checked bonds in my discount brokerage and below looks attractive. Any opinions?

Issuer: GENWORTH MI CANADA INC 
Coupon: 4.242% At Maturity: Apr 01, 2024 
Type: Bond Class: Corporate CUSIP #: 37252BAC6 
Credit Rating: A(high)
Yield: 4.161% 
Semi-Annual, 4.204%
Annual Face Value: $10,000.00 
Price (Per 100): $100.4574 
Accrued Interest: $3.49 
Estimated Cost: $10,049.23


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## james4beach (Nov 15, 2012)

This is something you should only hold in a tax sheltered account, because those big coupon payments will be taxed heavily.

Just beware, that's one of the companies in danger if it turns out Canadian real estate is plummeting. Genworth insures Canadian mortgages in the secondary mortgage market, and if delinquencies or bankruptcies rise, they will be in danger (this has not happened yet). But some people suspect that this market is turning sour and that Home Capital Group might have been the canary in the coal mine.

A corporate bond like this one is not very liquid, so I doubt you would be able to sell it back. You will be stuck holding it to maturity. So this is a 6.5 year bond yielding 4.16% which is 223 basis points more than a government bond.

Although this is showing as A-rated, there is also an S&P rating of BBB+
http://investor.genworthmicanada.ca...worth-Canada-DBRS-Ratings-Update/default.aspx

Personally I don't buy bonds with these kinds of low ratings, especially when I suspect the rating will go lower. They respond too much like stocks. For example if there is another scare about Canadian mortgages, like the Home Capital Group situation, then probably MIC stock will fall, and this bond's price will fall too. That's not a behaviour that I want in my fixed income.


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## AltaRed (Jun 8, 2009)

Which is why the yield is so much higher than a gov't bond. It has inherent (commensurate) risk, and I'd agree with James that proper risk may not be fully factored in. A run on Genworth due to collapsing RE prices could drop the market price of this bond faster than a rock. Remember some corp bonds dropping to the $20 range in the financial crisis?


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## Brainer (Oct 8, 2015)

james4beach:

Please help the newbie understand. When I look at a chart of VAB, it seems to me that with rising rates and other market fluctuations, it can take a while for the fund manager to catch up as the NAV declines due to rising rates. I know most of you aren't believers in market timing. But wouldn't it make more sense not to invest in something like VAB while rates might still be rising? It loos like VAB is now down about 6% from its last peak, while providing distribs of about 3%. IOW, Doesn't the time it takes for a fund manager to catch up buying higher YTM bonds just mitigate the potential earnings (at least while rates are rising or may be perceived as rising).


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## like_to_retire (Oct 9, 2016)

Brainer said:


> james4beach:
> 
> Please help the newbie understand. When I look at a chart of VAB, it seems to me that with rising rates and other market fluctuations, it can take a while for the fund manager to catch up as the NAV declines due to rising rates. I know most of you aren't believers in market timing. But wouldn't it make more sense not to invest in something like VAB while rates might still be rising? It loos like VAB is now down about 6% from its last peak, while providing distribs of about 3%. IOW, Doesn't the time it takes for a fund manager to catch up buying higher YTM bonds just negate the potential earnings (at least while rates are rising or may be perceived as rising).


Usually we hold onto bond funds and don't trade them, so if your time horizon is at least as long as the duration of your bond fund, you won’t lose any capital. Along the road as rates are rising, the manager will replace bonds with new ones that enjoy higher coupons and so your income will rise.

So, during a period of rising rates, hold onto a bond fund for a period equal to its duration, and you'll realize a rising income, and you won't lose capital. What's not to like?

ltr


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## james4beach (Nov 15, 2012)

Brainer said:


> Please help the newbie understand. When I look at a chart of VAB, it seems to me that with rising rates and other market fluctuations ... wouldn't it make more sense not to invest in something like VAB while rates might still be rising?


I think you're asking, given that the overall value of VAB (total return) drops with rising rates, wouldn't it make more sense to avoid VAB while rates might still be rising? And then jump into VAB once rates are "done" rising. This is a very popular belief -- that you should avoid bond funds while rates are rising -- but the answer is no, this is not a good idea. Here's why:

(1) You can't accurately predict that rates are rising. Central banks aren't crystal clear about their upcoming rate decisions, and generally tie the decisions to other market conditions. These conditions change.

(2) You're thinking of the short term central bank policy rate. This itself is hard to predict, but for the sake of argument let's assume that you can perfectly predict the rate decisions. The problem is ... these rates are not the same as the bond market rates/yields. There is a loose relationship between the central bank policy rate and bond prices (yields). I can illustrate this with the following graph:

http://stockcharts.com/h-sc/ui?s=AGG&p=D&st=2017-01-01&en=today&id=p98208074708

The bottom chart shows the Federal Reserve policy rate/short term interest rate. The top graph shows total return of AGG which is a broad US bond fund similar to VAB.

Look at the bottom graph. As you can see it's been in a rising trend through 2017 due to rate hikes. Let's *assume you had perfectly predicted the bottom graph* (which you can't by the way). So, we're pretending that you are certain that "interest rates are rising throughout 2017". If we had followed your idea of avoiding AGG during rising interest rates, we might feel vindicated by the March rate hike and drop in AGG. But look at the bigger picture of what happened through 2017. While interest rates were rising, AGG was rising too!

Year-to-date, "interest rates have gone up" and yet AGG is up +3%. Someone who followed the strategy you suggested and was hiding out in cash would have missed out on the bond returns. Hopefully this proves to you that the relationship between short term rates and bond price movements is weak.

(3) You can't accurately time your re-entry into bonds. Time and again people have tried this, but on average (historically) there is an opportunity cost suffered while "hiding out" in cash as illustrated in (2). Then the bonds rebound and you miss out on the gains. Or the bonds don't move the way you expect as they are only loosely coupled with short term central bank policy rates.

(4) Trying to actively trade the bond market, timing in & out as suggested, is doomed to failure. It's also pointless, since fixed income virtually guarantees you a positive return when you stay invested for (approximately) the average term length of the bond fund. With VAB this is about a 10 year horizon. In fact, bond funds even show positive returns during periods of steadily rising interest rates. So there really is no reason to fear rising interest rates as long as you stay invested in the bond fund for about the average term length. Many people don't know this, but even during the 1970s, with sharply rising interest rates, bond funds showed positive total returns. And then of course by the time interest rates peaked, the bond fund returns accelerated very substantially... hugely rewarding the person who was consistently invested.

However let's say you'll need to take the money out in about 2 years, then VAB is a bad idea. Your time horizon must be around 10 years.


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## james4beach (Nov 15, 2012)

To drive my point home further, look at the 4 year chart of the US interest rates (bottom graph) and bond fund AGG total return (top graph): http://stockcharts.com/h-sc/ui?s=AGG&p=D&yr=4&mn=0&dy=0&id=p56116637247

Over this 4 year stretch, Federal Reserve policy interest rates have been rising. It's gone up from 0.12% to 1.25%, that's the scary "rate hike" everyone has been freaking out about.

AGG has returned +12% in total, not annualized. You can see that there certainly were periods it dropped sharply, temporarily (as much as 5% drop in late 2016) but it also rebounded.

Someone hiding out in cash, out of fear of rising interest rates, would have only gotten about 1% to 2% return. Someone who stayed invested in their bond fund without trying to predict interest rates or time the bond market got substantially higher, 12% return.

Long term treasuries, TLT, have returned a whopping +30%.


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## gibor365 (Apr 1, 2011)

I hold bond Cameco bond that matures Jun 24, 2024. Shouldn't I get distribution Dec 24, 2024? Still didn't get it....

btw, is anybody buying individual bonds lately? There are some BBB with current yield above 4%


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## like_to_retire (Oct 9, 2016)

gibor365 said:


> I hold bond Cameco bond that matures Jun 24, 2024. Shouldn't I get distribution Dec 24, 2024? Still didn't get it....
> 
> btw, is anybody buying individual bonds lately? There are some BBB with current yield above 4%


If the bond matures on June 24, then on that day you receive the face value plus the final coupon. That's it - it's over.

ltr


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## Eder (Feb 16, 2011)

That bond distributes semi annually...you should have gotten the interest payment.


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## gibor365 (Apr 1, 2011)

Eder said:


> That bond distributes semi annually...you should have gotten the interest payment.


That was my understanding... If I don;t get it tomorrow , will call IE


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## james4beach (Nov 15, 2012)

gibor365 said:


> I hold bond Cameco bond that matures Jun 24, 2024. Shouldn't I get distribution Dec 24, 2024? Still didn't get it....
> 
> btw, is anybody buying individual bonds lately? There are some BBB with current yield above 4%


It should show up the next business day, so the broker should have paid it out today. If you still don't see it, phone them.


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## gibor365 (Apr 1, 2011)

Yeap, got it today


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## james4beach (Nov 15, 2012)

Glad to hear that. Some brokers seem to be more punctual than others. TD always delivers my government coupons on time, whereas Scotia iTrade seems 1 or 2 days late.


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## agent99 (Sep 11, 2013)

deleted - OR at least attempted to do so!


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## AltaRed (Jun 8, 2009)

gibor365 said:


> That was my understanding... If I don;t get it tomorrow , will call IE


It really shouldn't matter. Too many people fret about when their interest or dividends actually get posted. A few days here or there is not material.


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## gibor365 (Apr 1, 2011)

I'm a bit short of my target FI allocation and planning to buy more bonds.
Considering 2 bonds below.... Any opinions? Any difference holding USD bond in RRSP from CAD bond?
Issuer Maturity	Coupon	Qty. Avail. (000's)	Price/$100 Yield	Currency	Rating	
FAIRFAX Dec 06, 2027	4.25%	$1,427	$100.1189	4.235% s/a	CAD	BBB	
GENERAL MOTORS Oct 01, 2027	4.2%	$250 $101.713 3.985% s/a	USD A


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## AltaRed (Jun 8, 2009)

Your forex risk may be a lot more than either of the coupon rates. Do you know what will be the CAD/USD exchange rate in 2027? Are you willing to risk a 50/50 gamble in a 5-10% swing in the loonie by 2027? IOW, you could lose more than 10% value in forex if the loonie went to 90 cents by 2027.


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## gibor365 (Apr 1, 2011)

AltaRed said:


> Your forex risk may be a lot more than either of the coupon rates. Do you know what will be the CAD/USD exchange rate in 2027? Are you willing to risk a 50/50 gamble in a 5-10% swing in the loonie by 2027? IOW, you could lose more than 10% value in forex if the loonie went to 90 cents by 2027.


True, but I alsready hold US cash, and same risk will be if I buy US bond, US pref ETF, buy US equity or just leave it in ATL5500.
Also, by 2027 , we're planing to live 50% of the time abroad where USD more useful .
btw, I'm curious if I can make RRIFs withdravals in USD (without conversion to CDN), same way like I do contibutions into RRSP now


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## james4beach (Nov 15, 2012)

Notice today, the Bank of Canada raised interest rates, but all Canadian bonds are up today (bond yields are down). The market reaction to the rate increase was to reduce interest rates across the whole yield curve. Long term bond rates are down today too.

Cash rate went up, but rest of the rates went down. 10Y rate down 1 basis point. 30Y rate down by 2 basis points. The yield curve flattened. XSB and XBB are both up.

This is why I keep saying that you can't time the bond market and can't speculate on the shape of the yield curve + corporate spreads. It's not as simple as 'the central bank is going to raise rates and therefore bond funds are inevitably going to decline'. The BoC could keep gradually raising the short term rates and bond funds can continue to do very well over the years.

It's a mistake to avoid bond funds like XBB out of fear of rising interest rates. Instead, match your time horizon to the average maturity of the bond fund.


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## Jimmy (May 19, 2017)

james4beach said:


> Notice today, the Bank of Canada raised interest rates, but all Canadian bonds are up today (bond yields are down). The market reaction to the rate increase was to reduce interest rates across the whole yield curve. Long term bond rates are down today too.
> 
> Cash rate went up, but rest of the rates went down. 10Y rate down 1 basis point. 30Y rate down by 2 basis points. The yield curve flattened. XSB and XBB are both up.
> 
> ...


If you have the funds already leave them alone. For new $ , you can wait until the BoC is done hiking rates. XBB is down -1.35% for the year on price and - . 65% YTD. When rates go up , bond prices fall yields go up generally.


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## fireseeker (Jul 24, 2017)

Jimmy said:


> For new $ , you can wait until the BoC is done hiking rates.


Ummm, when will that be?? 
(Rhetorical question.)
I think James had it right -- you can't time the bond market, or any other market.


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## Jimmy (May 19, 2017)

fireseeker said:


> Ummm, when will that be??
> (Rhetorical question.)
> I think James had it right -- you can't time the bond market, or any other market.


? They just hiked them once already just this week. The Fed plans 3 hate hikes so there will be pressure on the BoC to match or see the $ fall to the low 70s. Rates aren't going to be 1.25% forever.


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## fireseeker (Jul 24, 2017)

Jimmy said:


> The Fed plans 3 rate hikes so there will be pressure on the BoC to match or see the $ fall to the low 70s. Rates aren't going to be 1.25% forever.


Ummm, the Fed "planning" three rates doesn't mean they will happen. 
Higher rates have been widely expected for more than five years -- 10 years, really. Yet, some bond yields went below zero, against all expectations.
Yes, rates went up this week. What happens next week is unknown and unknowable. And even if rates do up three more times, how will anyone know when the BoC will be "done." 
If your asset allocation calls for putting money into bonds, and you have that money, you should put it into bonds. Trying to predict and time rate hikes is folly.


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## james4beach (Nov 15, 2012)

Jimmy said:


> ? They just hiked them once already just this week. The Fed plans 3 hate hikes so there will be pressure on the BoC to match or see the $ fall to the low 70s. Rates aren't going to be 1.25% forever.


While the Fed hiked rates, US bond funds performed pretty well, still outperforming cash/short term bonds. Over the last 2 years, AGG outperformed BSV by quite a bit.

The same could happen in Canada. The BoC could keep raising rates, and bond funds can still perform well. It's not necessarily a good idea to sit in short term bonds just because you expect the central bank to raise rates.

More importantly, nobody is going to send you a memo when the tightening is over, or when the position reverses to easing/cutting. Even if someone does send you a memo, others are going to hear it before you, buy bonds, and push the prices up before you're able to act.


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## Jimmy (May 19, 2017)

fireseeker said:


> Ummm, the Fed "planning" three rates doesn't mean they will happen.
> Higher rates have been widely expected for more than five years -- 10 years, really. Yet, some bond yields went below zero, against all expectations.
> Yes, rates went up this week. What happens next week is unknown and unknowable. And even if rates do up three more times, how will anyone know when the BoC will be "done."
> If your asset allocation calls for putting money into bonds, and you have that money, you should put it into bonds. Trying to predict and time rate hikes is folly.


No they haven't. Gdp was stagnant for the last 5 years in fact they even cut rates in 2015. Ummm nearly every report you can read says the Fed will raise rates 3x but you can disregard them at your own peril. No bond yields went below 0. Not sure where you are getting your information. You can dump your $ into LT bonds now in a rising interest rate environment and watch them lose value if you like vs ST bond funds. Everything I have read suggests otherwise.


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## james4beach (Nov 15, 2012)

But Jimmy, the Fed funds rate has already been steadily increasing over the last 2 years. The scenario you describe is already under way... the rate at the short end of the curve is rising as we speak and has been for _years_.

And yet bond funds still do OK. Bond funds benefit from rising rates, as long as the rates rise gradually. It's not just about the direction of the overnight rate, but also the shape of the yield curve and speed at which all of this changes.

It can all play out the way you're describing as well, but it's hardly a sure thing that bond funds will underperform cash going forward.


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## Jimmy (May 19, 2017)

james4beach said:


> While the Fed hiked rates, US bond funds performed pretty well, still outperforming cash/short term bonds. Over the last 2 years, AGG outperformed BSV by quite a bit.
> 
> The same could happen in Canada. The BoC could keep raising rates, and bond funds can still perform well. It's not necessarily a good idea to sit in short term bonds just because you expect the central bank to raise rates.
> 
> More importantly, nobody is going to send you a memo when the tightening is over, or when the position reverses to easing/cutting. Even if someone does send you a memo, others are going to hear it before you, buy bonds, and push the prices up before you're able to act.


Many advisors on BNN are suggesting to be patient and wait a year to find out while making the same return in ST bonds more or less. Rates are still historically low at 1.25% and we have had 3 rate hikes now. They tend to keep to the same policy until they have reached the desired inflation target and it is no mystery what the US is doing. Just my .02 cents again.


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## fireseeker (Jul 24, 2017)

Jimmy said:


> No bond yields went below 0. Not sure where you are getting your information.


https://qz.com/1005720/negative-interest-rates-the-world-is-awash-in-9-trillion-of-bonds-that-are-guaranteed-to-lose-money/
I agree that interest rates are _likely_ to rise. I'm just saying there are no guarantees.
There are no guarantees with recommendations from BNN, either.


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## Jimmy (May 19, 2017)

Here is a good article from Money sense talking about LT bond etfs being too risky generally for most investors. Waiting a year or two until the rate hikes are done in a ST fund w new $ can't hurt.



> The most important idea is that, all other things being equal, short-term bonds are less sensitive to interest rate movements than bonds with longer maturities. Consider the iShares Core Canadian Universe Bond Index ETF (XBB), which holds a portfolio of bonds with an average maturity of about 10 years. During the 12 months ending September 30, 2017, this ETF lost 3.21%. Compare that to the iShares Core Canadian Short Term Bond Index ETF (XSB), which has an average maturity of less than three years: it lost less than 1% over the same period. Meanwhile, the iShares Core Canadian Long Term Bond Index ETF (XLB) plummeted more than 6%.





> In my opinion, long-term bonds are too volatile for average investors: they’re more suitable for institutional investors, such as pension funds.


http://www.moneysense.ca/save/inves...ate-when-interest-rates-are-expected-to-rise/


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## james4beach (Nov 15, 2012)

I agree with his point that long term bonds (like XLB) are too volatile and more suitable for pension funds. However XBB at 10 year average maturity isn't considered long term. Nobody is arguing you should invest in long term bonds, just in the normal XBB ones -- that's the same exposure that all balanced mutual funds hold, like Mawer Balanced Fund.

The person you quoted mentioned returns of XSB vs XBB to try to make the point that the less volatile XSB is also "less risky" than a regular bond fund like XBB when interest rates are rising. But before you take his word for it, look at the full calendar year performance figures. XSB short term bonds returned -0.07% in 2017 whereas XBB returned +2.34%, *even with two rate hikes from the BoC.*

2017 was yet another year where people hiding out in XSB out of fear of rising interest rates under-performed XBB.


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## Jimmy (May 19, 2017)

james4beach said:


> I agree with his point that long term bonds (like XLB) are too volatile and more suitable for pension funds. However XBB at 10 year average maturity isn't considered long term. Nobody is arguing you should invest in long term bonds, just in the normal XBB ones -- that's the same exposure that all balanced mutual funds hold, like Mawer Balanced Fund.
> 
> The person you quoted mentioned returns of XSB vs XBB to try to make the point that the less volatile XSB is also "less risky" than a regular bond fund like XBB when interest rates are rising. But before you take his word for it, look at the full calendar year performance figures. XSB short term bonds returned -0.07% in 2017 whereas XBB returned +2.34%, *even with two rate hikes from the BoC.*
> 
> 2017 was yet another year where people hiding out in XSB out of fear of rising interest rates under-performed XBB.


From his article, XBB lost 3.21 % , XSB 1% in the 12 months to Sept 2017. The losses were taken already. No getting around it XBB was a worse investment over the 1 year period. Many others are recommending ST for the same reasons. But over 10 yrs XBB will be better. Just wait awhile until it yields more before adding more.


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