# Short term bonds vs GIC



## gibor365 (Apr 1, 2011)

Next week my GIC will be unlocked...
Just was thinking what is better for fixed income allocation: Short term bonds (CBO/XSB) or GIC? What is your opinion?
I have a small position in CBO, so far it doing much better than majority of my stocks.
CBO has ratio between 52 weeks high/low just 3% and dividend = 4.6%.
So, if even you bought at most expensive price and hold for 1 year , on dividends you will earn more than GIC...
and if DCA during the year for 20.25-20.30 (it's frequently touching those levels)

Am I wrong?


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## fatcat (Nov 11, 2009)

gibor
CBO has a yield to maturity of 2.356%
XSB has ytm of 1.46%

you can get 2% in cdic high interest savings account and have access to the money anytime you want

i don't see the value of going after the extra .356 and assuming interest rate risk


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## gibor365 (Apr 1, 2011)

fatcat said:


> gibor
> CBO has a yield to maturity of 2.356%
> XSB has ytm of 1.46%
> 
> ...


Yes, I read about "yield to maturity", but to tell you the truth , I don't really understand what it is... I know that I bought CBO for 20.41 9 months ago, now it's 20.47 - it's nothing, but I got almost 3.5% in dividends from initial investment in 9 months.... no HISA/GIC will give it.... 
For last year + they pay constant monthly dividend 0.0785... can they reduce it?


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## Mike59 (May 22, 2010)

gibor said:


> ....So, if even you bought at most expensive price and hold for 1 year , on dividends you will earn more than GIC...
> and if DCA during the year for 20.25-20.30 (it's frequently touching those levels)
> 
> Am I wrong?


You could be wrong if the principal fluctuates enough. If interest rates rise at all in the general economy, bonds would be punished severely, expect 5-10% loss of principal for every 1% gain in the general interest rate, you then would be looking at having to hold for longer just to break even. 

I personally, keep my cash in a HISA. 

It's all a gamble, and comes back to your risk tolerance.


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## CanadianCapitalist (Mar 31, 2009)

Investopedia has a bunch of articles on bonds that are a very good introduction to the subject.

http://www.investopedia.com/university/bonds/#axzz1cYWLUKLZ

I'm looking for stability and liquidity in the bond portion, so I own XSB, which mainly holds government bonds. I've bought XSB over the years and while I agree that bond yields are extraordinarily low, I don't have a opinion on which way yields will move in the future. So, I continue to hold XSB. 

I agree that there is not much of a penalty in holding cash instead of bonds these days.

GICs are a good alternative but note that GICs are not liquid like XSB, so you should expect them to yield a bit more (and they often do).


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## andrewf (Mar 1, 2010)

The reason why bond funds look so good recently is because yields have been falling steadily. When the yield falls, the price rises, which compensates for the fact these funds are paying out more than the yield on their bonds. Eventually rates start rising and your bond funds will decline in value.

Always look at the YTM. That is what you will get over the duration of the bond fund (CBO it is ~3 years). I think a combination of high interest savings account and GICs is perfectly sensible.


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## NorthernRaven (Aug 4, 2010)

CanadianCapitalist said:


> GICs are a good alternative but note that GICs are not liquid like XSB, so you should expect them to yield a bit more (and they often do).


I don't know much about the various GICs and institutions out there, but (setting aside cases like death), are some of the "non-cashable" actually cashable with heavy penalties? This might be equivalent to selling a bond ETF at a loss.

In any case, there are some alternatives that combine better cashability terms with good rates. A CDIC example would be Ally, which has high rates and fully cashable GICs (principal only < 12 months, full interest on the 1-year, and 1% interest on longer terms). If you step outside the CDIC umbrella, Outlook has cashability at 1% combined with the higher Manitoba rates, and Hubert has a 1.75% cashout rate, after a 1-year lock-in (no 1-year GIC, but a high 2.5% HISA as an alternative). Wouldn't that be similar to the liquidity of a bond ETF (lacking, of course, any potential upside benefit).


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## CanadianCapitalist (Mar 31, 2009)

NorthernRaven said:


> I don't know much about the various GICs and institutions out there, but (setting aside cases like death), are some of the "non-cashable" actually cashable with heavy penalties? This might be equivalent to selling a bond ETF at a loss.


Typically, GICs are non-redeemable.

I suppose one could keep part of the bond portion in a GIC ladder and part of it in a bond ETF. That way, one can liquidate the bond portion for rebalancing purposes. I don't think holding the portion that may be sold for rebalancing in an Ally account would work because the RRSP transfer process could take weeks and the markets could move quite a bit by then.


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## Belguy (May 24, 2010)

I have heard several pundits on the financial channels suggest intermediate term corporate bonds for the current environment as an alternative to short term government bonds.

Any thoughts?

Also, there is no guarantee that inflation is going to return anytime soon. In fact, another recession in 2013 is just as likely.


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## fatcat (Nov 11, 2009)

> I have heard several pundits on the financial channels suggest intermediate term corporate bonds for the current environment as an alternative to short term government bonds.
> 
> Any thoughts?
> 
> Also, there is no guarantee that inflation is going to return anytime soon. In fact, another recession in 2013 is just as likely.


 yeah, i'd like to know what they mean by intermediate ?

i have phn total return which has a duration of about 5.6 and a yield of about 3.14
the short term funds aren't paying anything
i agree though, i think deflation is the looming threat ... by far

that's why i sold my gold
although i am convinced the fed will drop qe3
so i guess i better buy more (or maybe just avoid gold altogether)

forget returns, defending capital is the prime directive it seems to me


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## HaroldCrump (Jun 10, 2009)

fatcat said:


> yeah, i'd like to know what they mean by intermediate ?


Intermediate bonds are normally those with term to maturity of between 5 to 10 years.



> i have phn total return which has a duration of about 5.6


That's on the borderline between short and intermediate.



> Also, there is no guarantee that inflation is going to return anytime soon. In fact, another recession in 2013 is just as likely.
> ...
> i agree though, i think deflation is the looming threat ... by far


Don't get sucked into this deflation trap.
If you are holding bonds for their yield/distribution, you are not protected in this environment, regardless of the anti-inflation rhetoric and the interest rate games being played by the central banks.
If you need the bond distributions for living expenses, you will get wiped out.

There is no rule that says there must be deflation during recession.



> forget returns, defending capital is the prime directive it seems to me


GICs are the way to go in that case.


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## fatcat (Nov 11, 2009)

good advice harold

it seems to me you are talking about what i hear others talk about more and more
stagflation ....

and yes, i am still at 60.52% cash (hisa) and gic


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## cardhu (May 26, 2009)

gibor said:


> Just was thinking what is better for fixed income allocation: Short term bonds (CBO/XSB) or GIC? What is your opinion?
> I have a small position in CBO, so far it doing much better than majority of my stocks.
> CBO has ratio between 52 weeks high/low just 3% and dividend = 4.6%.
> So, if even you bought at most expensive price and hold for 1 year , on dividends you will earn more than GIC...


CBO and XSB are not short term bonds ... they are short term bond MUTUAL FUNDS ... big difference.
CBO and XSB do not pay dividends ... they issue distributions, composed primarily of interest. 
The distribution yield does not reflect earnings ... it merely reflects cash flow ... to determine what you’re earning on your investment (ie. the return), and to make a _valid_ comparison to GICs, you have to factor in your capital losses as well. 

The so-called “ladder” bond funds have been discussed before ... best to avoid these ... there’ve been several threads outlining the reasons why. 

You haven’t mentioned where you hold these investments. Be aware that CBO is subject to unfavourable tax treatment in a non-registered account, much worse than interest income, so it is really only suitable for holding inside a registered, tax-sheltered, account, if at all. 

I hold GICs and individual bonds, with cash in HISA ... I don’t like the prospects for bond funds, at this point in time. 



> _Yes, I read about "yield to maturity", but to tell you the truth , I don't really understand what it is._


The expression “yield to maturity” is a little misleading, since capital gains/losses are not technically a “yield” ... a more descriptive term might be “return to maturity” ... be that as it may, YTM refers to the overall return you will experience if you hold the bond to maturity, taking into account both the cash flow yield of the interest payments, PLUS whatever capital gain or loss you may incur by having purchased the bond at a premium, or discount, to par.


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## cardhu (May 26, 2009)

CC said:


> I don't have a opinion on which way yields will move in the future.


I find that difficult to believe. I can understand being unwilling to state an opinion, and I can understand not betting the farm on such an opinion, but I cannot fathom that the opinion doesn’t exist. At the very least, surely you must have some thoughts about probabilities ... about which direction yields are _more likely_ to move, in the intermediate or long term (the short term is a crap shoot) or about the probable magnitude of move that could occur, in either direction. 

Personally, I don’t believe that I’ll see negative benchmark bond yields in my lifetime ... therefore, there would seem to be a floor just a hair’s-breadth below the current yields, so that even if they do move south, there’s only so far south they can go ... there are no such limitations on the upside. Making investment decisions is rarely about making accurate predictions, it is more often about managing probabilities. 



> _I suppose one could keep part of the bond portion in a GIC ladder and part of it in a bond ETF. That way, one can liquidate the bond portion for rebalancing purposes._


Sacrificing return in exchange for liquidity is a valid choice ... in that respect, a combination of GIC’s / HISA also provides for the partial liquidity, but without the potential downside of the bond mutual funds. 



NorthernRaven said:


> I don't know much about the various GICs and institutions out there, but (setting aside cases like death), are some of the "non-cashable" actually cashable with heavy penalties? This might be equivalent to selling a bond ETF at a loss.


Setting aside cases like death, the non-cashable ones usually are truly non-cashable. There are a variety of cashable GICs on the market, but they are typically referred to as "cashable" as opposed to non-cashable. The terms vary. 



> _Wouldn't that be similar to the liquidity of a bond ETF (lacking, of course, any potential upside benefit). _


That’s a reasonable parallel ... liquidity at a cost ... . However, you make a good point. It might be possible to assemble a ladder of individual cashable GICs, that would provide for some liquidity, but without the potential downside of bond funds. As for the potential upside benefit, barring some minor blips in the short term, I suspect thats largely a pipe-dream in the intermediate to long term.


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## CanadianCapitalist (Mar 31, 2009)

cardhu said:


> I find that difficult to believe. I can understand being unwilling to state an opinion, and I can understand not betting the farm on such an opinion, but I cannot fathom that the opinion doesn’t exist. At the very least, surely you must have some thoughts about probabilities ... about which direction yields are _more likely_ to move, in the intermediate or long term (the short term is a crap shoot) or about the probable magnitude of move that could occur, in either direction.


Why is it hard to believe? If I bet that expected total returns from bonds over its term to be the same as the current yield I'd be right 90% of the time. That is a very high accuracy rate, so I'm not willing to bet against it.

A combination of GICs and cash in lieu of bonds is not a bad choice. Neither is a short duration bond fund like XSB. Even if rates rise, if you hold XSB for its duration, an investor will break even.

http://thewealthsteward.com/2011/07/the-relevance-of-ytm-the-impact-of-rising-rates/


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## leoc2 (Dec 28, 2010)

CanadianCapitalist said:


> A combination of GICs and cash in lieu of bonds is not a bad choice. Neither is a short duration bond fund like XSB. Even if rates rise, if you hold XSB for its duration, an investor will break even.
> 
> http://thewealthsteward.com/2011/07/the-relevance-of-ytm-the-impact-of-rising-rates/


CC what are your thoughts on a fixed income portfolio with equal weight of XSB, XBB, and XRB. The interest generated would be used for retirement living and there is no intent to ever sell the ETFs.


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## gibor365 (Apr 1, 2011)

leoc2 said:


> CC what are your thoughts on a fixed income portfolio with equal weight of XSB, XBB, and XRB. The interest generated would be used for retirement living and there is no intent to ever sell the ETFs.


With no intention to sell and live on interest.... than why bonds? buy 10 dividend aristocrats that give 5-6% dividends and live with it...


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## leoc2 (Dec 28, 2010)

gibor said:


> With no intention to sell and live on interest.... than why bonds? buy 10 dividend aristocrats that give 5-6% dividends and live with it...


I am setting up a portfolio with an asset allocation of 40/60 equity/fixed and then I will teach my wife how to rebalance it once a year. We have sufficient DB pensions that we should not need to withdraw the capital. The equity allocation is via dividend ETFs. Her family medical history predicts a long and healthy retirement. Mine not so long. My wife has no interest in finances let alone knowing when one aristocrat should be sold and replaced by another. If I am successful at my goal then she can continue living off of the interest and if not I will recommend she buys annuities when I am gone. I continue to dollar average my 100% cash position. I started in Oct and I will be done in March. She will retire in 2 years and I will in 5. We have time to test run this plan.


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## cardhu (May 26, 2009)

CC ... perhaps we have a different definition of “opinion” ... but never mind, its not important. 



CC said:


> If I bet that expected total returns from bonds over its term to be the same as the current yield I'd be right 90% of the time.


I’m not sure what you mean by this ... if you’re suggesting (for example) that there’s a 90% probability XSB will achieve total return equivalent to its current yield of 3.2%, regardless of what yields do, then I think you are optimistic in the extreme ... current yield should never be taken as an indicator or predictor of total return. 
http://thewealthsteward.com/2011/06/distribution-rate-does-not-equal-yield/



> _Even if rates rise, if you hold XSB for its duration, an investor will break even._


I never suggested that XSB would lose money, only that (in my opinion) there is a high probability that it would make less money, for comparable risk.


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## CanadianCapitalist (Mar 31, 2009)

cardhu said:


> I’m not sure what you mean by this ... if you’re suggesting (for example) that there’s a 90% probability XSB will achieve total return equivalent to its current yield of 3.2%, regardless of what yields do, then I think you are optimistic in the extreme ... current yield should never be taken as an indicator or predictor of total return.
> http://thewealthsteward.com/2011/06/distribution-rate-does-not-equal-yield/
> 
> I never suggested that XSB would lose money, only that (in my opinion) there is a high probability that it would make less money, for comparable risk.


No. What I'm saying is that there is a 90% chance that the total return from XSB over its duration of 2.6 years will be its current YTM less expenses, which is currently 1.22% or so (I agree with the points on cash distribution that Dan Hallett made. I did not mean to imply that XSB will return its current cash distribution of 3.2% over its duration. By 'yield' I meant the YTM, not current cash yield. Sorry for the confusion.).


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## CanadianCapitalist (Mar 31, 2009)

leoc2 said:


> CC what are your thoughts on a fixed income portfolio with equal weight of XSB, XBB, and XRB. The interest generated would be used for retirement living and there is no intent to ever sell the ETFs.


Wouldn't a bond ladder better serve your objectives? You are looking to spend the interest income and you might like to have control over rolling (or not) over maturing bonds. You may also want to consider long-dated bonds to match your retirement spending.


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## leoc2 (Dec 28, 2010)

CanadianCapitalist said:


> Wouldn't a bond ladder better serve your objectives? You are looking to spend the interest income and you might like to have control over rolling (or not) over maturing bonds. You may also want to consider long-dated bonds to match your retirement spending.


CC I am setting up a portfolio with an asset allocation of 40/60 equity/fixed and then I will teach my wife how to rebalance it once a year. We have sufficient DB pensions (with partial inflation protection) that we should not need to withdraw the capital. The portfolio returns will serve as additional retirement income and act as an additional inflation hedge. Portfolio growth is not a priority. It will be a home-made annuity. Her family medical history predicts a long and healthy retirement. Mine not so long. My wife has no interest in finances let alone controlling the maturity roll over of bonds. However she handles excel budget spreadsheets at work. Thus I want to use a small number of ETFs. If I am successful at my goal then she can continue living off of the interest and if not I will recommend she buys annuities when I am gone. She will retire in 2 years (@55) and I will in 5 (@60). We have time to test run this plan.


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## cardhu (May 26, 2009)

CC said:


> By 'yield' I meant the YTM, not current cash yield.


OK ... by ‘current yield’ you meant YTM ... that makes more sense ... but where does this 90% probability comes from? ... and I’m sorry, but this brings us back around to my original observation about opinions ... I don’t see how you can suggest a 90% probability of returning at least the YTM over that period of time, without having an opinion about rate directions ... you’re essentially predicting, with 90% confidence, that yields on the range of maturities reflected in this fund will NOT be any higher in 2.6 years than they are today ... those are the conditions that would be required to achieve the performance you’ve stated ... if that’s not an opinion about rate directions, what would you call it? 



gibor said:


> .... why bonds? buy 10 dividend aristocrats that give 5-6% dividends and live with it...


No matter how safe or secure you think ‘dividend aristocrats’ might be, they are not fixed income ... I understood leoc to be asking about the fixed income portion of his allocation. 

BTW, how many former dividend aristocrats have gone bankrupt in the past 3 years? How many have severely curtailed their dividend payments? I don’t know the specific answers because I don’t keep up to date on who has made the “best-dressed” list every year, but I’d be willing to bet it was more than a few.


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## gibor365 (Apr 1, 2011)

cardhu said:


> BTW, how many former dividend aristocrats have gone bankrupt in the past 3 years? How many have severely curtailed their dividend payments? I don’t know the specific answers because I don’t keep up to date on who has made the “best-dressed” list every year, but I’d be willing to bet it was more than a few.


very few cut their dividends....I don't remember exactly...you can go to seekingalpha.com , search by David Fish .... there are list of all div champions from 2007


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## cardhu (May 26, 2009)

It was a rhetorical question.


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## gibor365 (Apr 1, 2011)

Just for fun I did calcs about CBO return assuming that stock price/dividend doesn't change and you start with 300 shares.
In 10 years your return would be 54.5% or 5.45% annual .... if price at the end of the 10 years period suddenly drops to all time low (so far it's $20.1), return would be 5.2% annually.
The best rate i can get now for 5 years in my discount brokerage - NATIONAL BANK 2.68% (compaunded annually). in case of GIC I would get 2.69% annually in 10 years.
In order to get return the same as CBO, GIC rate for second 5 year period should be 6.5%. Is it possible?


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## webber22 (Mar 6, 2011)

For CBO what are you using to calculate the 10 year return? You should be using the yield to maturity which is around 2.2%. With your 5.45% return calculated, you were probably using the cash yield in error.


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## gibor365 (Apr 1, 2011)

webber22 said:


> For CBO what are you using to calculate the 10 year return? You should be using the yield to maturity which is around 2.2%. With your 5.45% return calculated, you were probably using the cash yield in error.


I was using price I bought it 20.41 and dividends I get every months and it's exact 0.0785 per share 
Do you mean that dividends can be cut?


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## andrewf (Mar 1, 2010)

Possibly. That distribution is greater than the yield, so it eats into the capital of the fund. Falling yields have cause bonds to appreciate, which masks this phenomenon, but once yields stabilize or start rising, you should expect the fund to fall in value.


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## gibor365 (Apr 1, 2011)

andrewf said:


> Possibly. That distribution is greater than the yield, so it eats into the capital of the fund. Falling yields have cause bonds to appreciate, which masks this phenomenon, but once yields stabilize or start rising, you should expect the fund to fall in value.


It still unclear fo me.... CBO YTD is practically unchanged, for last year + (when CBO started to pay div on monthly basis) , the dividends is unchanged 0.0785 per share ... the only way yield decreases (except cutting dividends) -_ if price of CBO going up significantly...
for another short bond ETF XSB -> dividends are slightly fluctuate any months


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