# Who's buying individual bonds?



## swoop_ds (Mar 2, 2010)

Anyone out there buying bonds these days? Which bond desk are you using? What mix of maturity dates? do you generally sell before maturity or hold until maturity? I have been reading a lot about bonds lately, and find myself mostly interested in buying bonds and holding them to maturity. I also ordered the book "In your best interest", and I'm just waiting for it to show up.


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## warp (Sep 4, 2010)

Buying individual bonds these days has become quite difficult, if only for the fact that interest rates are so low.

Reading "In Your Best Interest", by Hank Cunningham, is a good start in getting to understand bonds. However the Bond market is very complicated and small retail investors are at a disadvantage. Secondly the fees you pay to buy individual bonds are hidden in the price you pay, and so your already small returns, which will prob not even cover inflation and taxes, will be even smaller.

If you do buy bonds, you may generally want to keep them to maturity, and as rates have nowhere to go but up at some point, you should stay in lower maturity bonds. If truth be told, these days you may be better off just putting your money in a high interest daily savings account, if safety is your number one concern.

Personally I have been unable to find any reasonable, investment rated corporate bond to buy in several years.


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## fatcat (Nov 11, 2009)

my conclusion about individual bonds for retail investors is that you get the leftovers
the really good issues get sold to institutional clients


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## AltaRed (Jun 8, 2009)

I buy individual investment grade corporate bonds for my RRSP account (as part of my GIC ladder). Typically I roll over a maturing 5 yr GIC (or corporate bond) into another GIC (or corporate bond). So far, my GIC ladder is made up of about 70% GICs and 30% corporate bonds. Retail pricing for bonds gets satisfactory at levels above $20k at most discont brokers, or in the case of Scotia iTrade, commission pricing is clear up front. Corporate bonds can juice my GIC returns by 50-100 bp depending on the specific issue and at lower investment grades (e.g. A or A- or BBB+ or BBB).

Buying bonds in a taxable account can be tricky because you must also purchase 'accrued interest' as part of the purchase. That said, this 'accrued' interest is an investment expense item on one's tax return. Accrued interest purchase is smallest IF you purchase the bond shortly after its interest payment date, e.g. July 5 for a bond paying interest June 30, and largest IF you purchase the bond well after its interest payment date, e.g. Dec 15 for a bond paying interest June 30 (and Dec 30). Most bonds pay interest semi-annually.


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## swoop_ds (Mar 2, 2010)

Thanks for the replies. Two questions:
1. In terms of the fees, would you get a yield somewhere in between the bid/ask spread, and the broker is getting their fee already? (What I mean, is that the fee is built into the yield already?)
2. I've seen some yields in the 5-8% range from corporations, are these a good idea? They seem to be either relatively long maturity or of a lesser credit rating. 

I don't know that I'm against buying bonds that are a bit longer term for good yield but there is always the risk of the company going belly up. What is the chance of this happening to somewhere like bell or sherritt or other large Canadian company? Also, from what I understand, the bonds get payed out first before shareholders?


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## warp (Sep 4, 2010)

swoop_ds said:


> Thanks for the replies. Two questions:
> 1. In terms of the fees, would you get a yield somewhere in between the bid/ask spread, and the broker is getting their fee already? (What I mean, is that the fee is built into the yield already?)
> 2. I've seen some yields in the 5-8% range from corporations, are these a good idea? They seem to be either relatively long maturity or of a lesser credit rating.
> 
> ...


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## swoop_ds (Mar 2, 2010)

Hello,

I certainly want to read more before rushing in. Am I reading the charts at the following link wrong?
http://www.pfin.ca/canadianfixedincome/Default.aspx

I'm speaking of the sherritt binds but there are also others from bell for instance that "seem" to be in the 5%+ range. Once again it's very likely that I'm reading this wrong.

There were also similar charts at questrade, in their bond newsletter(I think that's what it was called). I found lower yields (highest was 5.5ish) on td Waterhouse in their fixed income tab.


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## james4beach (Nov 15, 2012)

swoop_ds said:


> Anyone out there buying bonds these days?


I do, yes but only government, provincial, and municipal bonds. I find that the availability of government bonds is particularly good at both TD Waterhouse and iTrade and am extremely happy with the liquidity and pricing competitiveness. The retail availability for these has become much, much better over the last ten years.

I buy maturities up to around 10 years and always hold to maturity.

Not sure I would buy individual corporates, unless
a) I had really large amounts of money and could create a truly diverse portfolio
b) Had an excellent external data source and could be confident I was getting good quotes
c) Had more corporate expertise, to avoid tricky exotic corporates that emerged in recent years

If you're trading corporate bonds, be aware that liquidity is generally not good in corporates. All of this is traded over-the-counter and prices are not very transparent so you should have multiple brokers available, in my opinion. Otherwise the broker could really be ripping you off.


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## james4beach (Nov 15, 2012)

I will add my standard reply that my approach is to maintain a fixed income portfolio that is a *ladder of individual bonds plus GICs*. I do this because the fees are much less than a bond ETF, and although it's slightly less liquid than an ETF, it offers me control to get exactly the kind of risk exposures I'm comfortable with.

Up to the CDIC guaranteed 5 year maturity, I stick to GICs. Beyond 5 year maturities, I buy government bonds and hold to maturity (treating them like a GIC by looking at ytm). And I keep laddering these. In my case, I am using GICs in lieu of corporate bonds as I feel that the risk/reward tradeoff is better with GICs and in particular I like the deposit insurance.


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## wendi1 (Oct 2, 2013)

I have a ladder of Provincial and Federal strips and zeros in my RSP that I bought when interest rates were higher. I've gotten a lot of capital gains from them.

Lately, I can't bring myself to buy any more. GICs of five years or less have better interest rates, and are guaranteed. As the bonds mature, I buy GICs (keeping carefully to those with CDIC guarantees, and keeping under the $100K limit per bank).

Corporate bonds have more return, but more risk as well, and so wouldn't be a good replacement for the ones that are maturing.


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## AltaRed (Jun 8, 2009)

swoop_ds said:


> Hello,
> 
> I certainly want to read more before rushing in. Am I reading the charts at the following link wrong?
> http://www.pfin.ca/canadianfixedincome/Default.aspx
> ...


You are looking at bonds with very long maturities. The Bell bond at 6.25% has a maturity date of 2050 (almost 37 years away). That bond's capital value will have huge swings with small changes in interest rates. Unless you are going to be around to sell it in the 2045 time frame or collect the face value when it matures, that is a very long bet on interest rates. Most people here would not look at a bond beyond a matury date of circa 2025, and maybe even 2020. I do not look at bonds with maturity dates beyond 2020.


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## alingva (Aug 17, 2013)

When junk bonds pay less than 6% (meaning all other bonds pay much less) - buying bonds is not such a good idea. IMHO


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## warp (Sep 4, 2010)

swoop_ds said:


> Hello,
> 
> I certainly want to read more before rushing in. Am I reading the charts at the following link wrong?
> http://www.pfin.ca/canadianfixedincome/Default.aspx
> ...


Swoop....when it comes to bonds, anything with a high yield, will also have high risk,,,,,( low rated company with debt problems). ANY company can go bankrupt,,,something I myself have learned the hard way.
As well they prob will have long maturities, which is something you may not want.

Also, the prices and yields you see on the Canadianfixedincoem website, are prob for institutional buyers. I doubt that you would be able to get these. 

If you are buying bonds for safety of principal...then buy only govt, and very high rated corps, and stick to a shortish maturity......the other route for extra income to is put a portion of your fixed income into high yield junk bonds throughan ETF,,,,I own JNK in the US,,,there are several here in Canada that are dollar hedged if you'd like. Just go to Ishares.ca, and look them up.

As an alternative, you could buy dividend paying stocks, perhaps through an ETF like XDV, or ZDV, or CDZ.

Good luck.


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## james4beach (Nov 15, 2012)

alingva said:


> When junk bonds pay less than 6% (meaning all other bonds pay much less) - buying bonds is not such a good idea. IMHO


Again this is why I like GICs personally. Sorry to be a pest about this, to the people sick of hearing this

A low grade bond in Canada, going by say XHB which partially has junk bonds, yields around 5.0% after fees at the 8 year maturity mark.
A CDIC-insured 5 year GIC yields 2.9%

So even though you're exposed at a longer maturity, and much more risk, you're only getting 2% more yield in the (nearly) junk bonds!
What's more, that 2.9% GIC is insured by government! It's a guaranteed total return.

I'm not a fan of corporate bonds at current prices and spreads


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## HaroldCrump (Jun 10, 2009)

I am a buyer of individual bonds, but I haven't bought any new ones in the last 2 - 2.5 years.
I think the last one I bought was late 2010 or so.
Q/E - II and Op. Twist put an end to my bond dreams, I guess.

Since then most of the ones I had have either matured to term, or been early redeemed by the company.
I am left with only one maturing in 2016, and one convertible debenture.

If/when I find the bond market favorable for me, I will once again be a buyer of individual bonds.


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## HaroldCrump (Jun 10, 2009)

fatcat said:


> my conclusion about individual bonds for retail investors is that you get the leftovers
> the really good issues get sold to institutional clients


I think this is slowly but surely changing now.
This is more of a perception left over from several years ago.

These days, any of the big bank discount brokerages with a self-respecting bond desk should be able to get you any Canadian bond you ask for (leaving aside very marginal, low grade, illiquid bonds).
The only question is one of competitive pricing.
You won't get primary market pricing for sure, agreed.

But I think the pricing for retail investors is getting better all the time.

You will get best pricing for amounts of $25K or more.
$5K will get you very bad pricing.


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## lonewolf (Jun 12, 2012)

Lately, I can't bring myself to buy any more. GICs of five years or less have better interest rates, and are guaranteed. As the bonds mature, I buy GICs (keeping carefully to those with CDIC guarantees, and keeping under the $100K limit per bank). 

The unintended consequences of BS CDIC quarentees, investors buy based weather the GIC is backed by a goverment that can never pay off all its IOUs. Get rid of CDIC insurance let sound banking practices make the system strong. Maybe I should reword that to let "sound credit unioning practices" make the financial system strong. The banks stab thier customers in the back thats the banks job to make money from its customers not to make money for its custumers.


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## Eder (Feb 16, 2011)

As well as HC mentioned to buy at least 25k at a time it is important to talk direct to a broker for best bond prices when purchasing...as with GIC's the best prices are not online.


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## HaroldCrump (Jun 10, 2009)

Eder said:


> As well as HC mentioned to buy at least 25k at a time it is important to talk direct to a broker for best bond prices when purchasing...as with GIC's the best prices are not online.


+ 1.
At Scotia iTrade I have been able to talk to a bond desk broker directly and gotten slightly better price than the one quoted online.
This was prior to the _buck-a-bond_ program, which charges a trading commission for bond purchases.
Back then (pre 2010), all commissions and fees were embedded into the ask price.

I haven't yet used the Buck-a-Bond program.

I also found that the bond inventory online was not up-to-date all the time.
The bond desk told me (at that time) to basically ignore the online inventory and quotes, just call and ask for whatever bond you are interested in and they will procure it for you.

For best results, please bring amounts higher than $10K and ideally $25K :biggrin:


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## swoop_ds (Mar 2, 2010)

I'm in the midst of setting up an account with questrade. Does anyone know if the bond prices in their 'bond bulletin' are accurate? 

There are some yields for sherrit bonds that mature in under 5 years that seem juicy. I don't think that sherrit is going anywhere but I guess you never know for sure.


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## AltaRed (Jun 8, 2009)

swoop_ds said:


> There are some yields for sherrit bonds that mature in under 5 years that seem juicy. I don't think that sherrit is going anywhere but I guess you never know for sure.


Define juicy in terms of YTM, not coupon. What investment grade are they? That might tell you.


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## swoop_ds (Mar 2, 2010)

They were 8% ytm. I can't link to the document because it's accessed through my account. A slightly older bulletin (OCT 10) is the first link if you search for 'questrade bonds bulletin' on google and go to page 15 of the PDF. (Sorry it's hard to link on my phone)


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## liquidfinance (Jan 28, 2011)

swoop_ds said:


> They were 8% ytm. I can't link to the document because it's accessed through my account. A slightly older bulletin (OCT 10) is the first link if you search for 'questrade bonds bulletin' on google and go to page 15 of the PDF. (Sorry it's hard to link on my phone)


This one

Sherritt Intl 7.5 24/09/20/19 (C) 500,000 Coupon 7.500 Maturity 24/Sep/20 Price 96.75 YTM 8.12 823901AK9 Callable at 100 in 2019


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## james4beach (Nov 15, 2012)

Those are callable bonds. Does that change things?

Also why is 823901AK9 not rated? Is it an exotic/convertible bond of some kind?


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## swoop_ds (Mar 2, 2010)

I'm not really sure. What is the risk involved with having a bond called? You get the principle sooner and lose out on future coupon payments?


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## HaroldCrump (Jun 10, 2009)

james4beach said:


> Also why is 823901AK9 not rated?


I see this same bond as being rated BB+ at Scotia iTrade.
It is below investment grade.
And yes, it is callable for par value in 2019.

TTM is not under 5 years as stated above.
It is 6+ years, so this is on the lower end of mid-term.

BTW, Scotia iTrade is showing a better YTM than Questrade for the same bond i.e. better pricing.
But they have trading fees for bonds.


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## swoop_ds (Mar 2, 2010)

I guess I read wrong about the maturities. Still seems like an okay deal to me. Btw I'm okay with some risk as my time horizon is 30+ yearss


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## AltaRed (Jun 8, 2009)

swoop_ds said:


> I guess I read wrong about the maturities. Still seems like an okay deal to me. Btw I'm okay with some risk as my time horizon is 30+ yearss


At BB+, this is a junk (high yield) bond. Most retail investors would not buy these as individual bonds, i.e. only in a junk (high yield) bond fund.


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## liquidfinance (Jan 28, 2011)

Nothing wrong with taking a look at it though. There could be some value.

You need to research the company same as you would when purchasing the stock. Can they afford the interest payments? What are their debt levels?
Chart doesn't look fantastic but they are paying a dividend and that was increased March this year.


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## swoop_ds (Mar 2, 2010)

That's the thing, I read some info about sherrit and it seems likely that they aren't going anywhere in the next 5 or 6 years. It doesn't 'seem' that risky to me. But maybe I'm being naive about it.

On the other side of the coin, I could 'lock in' the 8% and then be stuck with it in a bull market. Of course, I would still have my other investments to 'catch' any bullish activity of the market.

I think the main risk is default, but it seems like bond owners get paid before stock owners, so even then there would be a chance that the principal money wouldn't necessarily get decimated. Would it?


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## james4beach (Nov 15, 2012)

swoop_ds said:


> On the other side of the coin, I could 'lock in' the 8% and then be stuck with it in a bull market.


lol that made me laugh... sorry I think that's the _least_ of your worries (that the broad market will outperform 8% over the next 6 years)

If the TSX outperforms 8% per yr over the next 6 years, I will buy everyone on this forum a McDonald's ice cream


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## liquidfinance (Jan 28, 2011)

That's the thing there is nothing wrong with looking at it like that.

If you want it for the safety of a bond then it's not ideal. But from a calculated risk point of view it offers much more security than a pure play on the stock. Of course you are limiting your upside but being rewarded with the favourable YTM.


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## swoop_ds (Mar 2, 2010)

Thanks for all the input everyone. I swear that one day I will have input that will be useful on here!


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## james4beach (Nov 15, 2012)

Yes I'd say the default risk is the main risk you face. Personally I think corporate bonds (and especially junk bonds) should only be held in a well diversified portfolio.

I would certainly hope that you've taken a very good look at their balance sheet before buying a junk bond. Buying any corporate bond without analyzing the balance sheet and cashflow statements is like making a blind gamble.


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## AltaRed (Jun 8, 2009)

swoop_ds said:


> Thanks for all the input everyone. I swear that one day I will have input that will be useful on here!


The question was valuable....in itself good to stimulate discussion. What one needs to think about when looking at high yield bonds is: 1) Why did the company have to offer the high(er) coupon rate in the first place to attract buyers (think money managers), and 2) why is it being priced at a discount to par now at even a higher YTM than coupon rate? 

The bond market is generally considered to be larger and more sophisticated than the equities market so mispricing, at least at investment grade, is not common. That said, credit ratings below investment grade pretty much rule out the institutional market such as CPP, OTPP et al, and that leaves money managers and retail investors free to speculate and potentially misprice product.


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## GoldStone (Mar 6, 2011)

swoop_ds said:


> I think the main risk is default, but it seems like bond owners get paid before stock owners, so even then there would be a chance that the principal money wouldn't necessarily get decimated. Would it?


The recovery rate is well below 100%. ~50% for the most senior secured bonds. Less than 15% for subordinated bonds. See Exhibit 12 on page 12:

Moody's Global Credit Research
Default and Recovery Rates of Canadian Corporate Issuers, 1989-2007
https://www.moodys.com/sites/products/DefaultResearch/2007100000513265.pdf

While you are at it, take a look at Exhibit 9 on page 9. It shows the default rates. 6.2% of Ba bonds and 18% of B bonds default by year 5. They don't show the default rates for longer than 5 years. The default rates are obviously higher the longer you go.


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## GoldStone (Mar 6, 2011)

I recall an investor on the old TWB board who played exclusively in the junk bond space. He took all his risk there... he didn't bother with equities. This investing style requires special expertise that very few of us have. Most of us run a more conventional portfolio: equities for risk/reward, bonds for safety.


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