# Bonds vs High Interest Savings Account



## Kursor (Mar 7, 2014)

*Bonds vs High Interest Savings Account Yields*

People's Trust TFSA HISA is 3% been like that since 2009 (yes they were hacked before. They are CDIC insured up to $100k so it doesn't bother me). 
Is there any reason to keep bonds in your Couch Potato Portfolio (Non-Equity portion) if HISA yield's are greater than bond yields?

If bond yields start moving up beyond HISA yields, I could just withdraw from TFSA near year end and redeposit (*at the beginning of the following calendar year*) into the discount brokerage to buy bonds.

Portfolio composition:
RRSP (Index Fund ETFs & Multinational Big Cap Stocks that has never lowered their dividends)
TFSA (HISA and/or Bonds)
Non-Reg (CAD Dividend Big Cap Stocks that has never lowered their dividends)


----------



## mrPPincer (Nov 21, 2011)

I use People's Trust TFSA HISA and am not using bonds or GICs right now (sitting at 28% cash at the moment).
Cash has the advantage of being ready to be deployed immediately for corrections in equity prices, but the main reason I'm using HISAs is that bonds & GICs are not paying more, or not enough more to lock in, in a potentially rising interest rate environment, for me at least.


----------



## james4beach (Nov 15, 2012)

I understand what you're getting at.

The things you're comparing are different types of market exposure, so one reason to keep the fixed income (bonds/GICs) is if you want to have some exposure in that bucket, instead of just cash exposure.

HISA: cash, shortest end of the yield curve, tied to the Bank of Canada overnight rate. Yield could get cut, but very unlikely to go higher.

Bonds: midway through the yield curve, not directly tied to BoC rate. Locks in a yield for many years, as opposed to HISA/cash. Can gain value if interest rates drop, or lose value of rates go up.

I'm trying to point out they're different type of exposure with different characteristics. Here are a few hypothetical scenarios in which you would be better off with bonds (I would prefer GICs, actualy)


 PT could discontinue their high HISA rate. With a GIC, your yield is locked in
 If Bank of Canada lowers rates, the HISA yield may decline. Bond values would increase


----------



## richard (Jun 20, 2013)

james4beach said:


> PT could discontinue their high HISA rate. With a GIC, your yield is locked in
> If Bank of Canada lowers rates, the HISA yield may decline. Bond values would increase


Overnight rates are not the same thing as bond yields. Bond values and yields depend on the market, not policy.

If you hold bonds as a defensive move rather than a way to increase returns then cash looks like a good alternative right now. And if the interest rate on cash is higher it seems pretty easy (don't forget the MERs on bond funds).


----------



## Kursor (Mar 7, 2014)

True, they are different market exposure (bonds vs HISA). 
Are benefits of holding bonds to diversify/mitigate risk of the Equity parts of your portfolio greater than yield & guaranteed fixed income of the PT TFSA (3%)? Are there any kinds of measurements and/or thresholds to determine this? 

PT TFSA HISA has been 3% since 2009. From my searches of previous threads dating from 2009, 2010...2013, 2014, people keep mentioning they can lower it at any time. 2014, still at 3%. 

If bond yields were to surpass 3%, I'd have enough time to reshift my $31k+ in my People's Trust HISA to Bonds and come out ahead of someone who strictly invested in short term CAD bond index?



james4beach said:


> I understand what you're getting at.
> 
> The things you're comparing are different types of market exposure, so one reason to keep the fixed income (bonds/GICs) is if you want to have some exposure in that bucket, instead of just cash exposure.
> 
> ...


----------



## cjk2 (Sep 19, 2012)

My main reason for not using a 3% HISA is because it is restricted to a TFSA...and my TFSA contribution room is limited. I don't want to waste my precious contribution room on such a low-yield savings account, simple as that.

If a 3% savings account was available outside of a TFSA, I would definitely jump on that immediately and sell off my entire bond index to make the switch. Or if I actually held bonds inside my TFSA (but why would I do that?), of course the better choice might be to go for the HISA instead. For now though, bonds still have a higher return than the alternative outside a TFSA.

*Edit: *I just saw your portfolio composition. I'm wondering why you are holding your lowest-yield investments inside the TFSA? You aren't really taking full advantage of the tax-free benefits of a TFSA that way...


----------



## Kursor (Mar 7, 2014)

If the benefits of sheltering capital gains (50% taxed) for you is greater than interest earned in TFSA HISA (100% taxed). I don't have high confidence (risk tolerance) in myself to do this, since I'm already heavily exposed in Equities in my RRSP and Non-Reg accounts.

Bond yields are taxed at 100%, right?

I'm striving for tax efficiency, hence putting bonds or HISA (Taxed at 100%) in a TFSA instead of trading stock in a TFSA and sheltering capital gains (Taxed at 50%)



cjk2 said:


> My main reason for not using a 3% HISA is because it is restricted to a TFSA...and my TFSA contribution room is limited. I don't want to waste my precious contribution room on such a low-yield savings account, simple as that.
> 
> If a 3% savings account was available outside of a TFSA, I would definitely jump on that immediately and sell off my entire bond index to make the switch. Or if I actually held bonds inside my TFSA (but why would I do that?), of course the better choice might be to go for the HISA instead. For now though, bonds still have a higher return than the alternative outside a TFSA.
> 
> *Edit: *I just saw your portfolio composition. I'm wondering why you are holding your lowest-yield investments inside the TFSA? You aren't really taking full advantage of the tax-free benefits of a TFSA that way...


----------



## richard (Jun 20, 2013)

The benefits of holding bonds are a higher yield, however that comes with more risk and if the yield is not much higher or is even lower then it's not much of a benefit. As a rule it's best to decide what you want in your portfolio first and then figure out the best accounts to hold it in.


----------



## cjk2 (Sep 19, 2012)

Kursor said:


> If the benefits of sheltering capital gains (50% taxed) for you is greater than interest earned in TFSA HISA (100% taxed). I don't have high confidence (risk tolerance) in myself to do this, since I'm already heavily exposed in Equities in my RRSP and Non-Reg accounts.


I'm not suggesting you convert the cash in your TFSA HISA to equities. However, given that equities outperform cash in the long term, it seems more beneficial to hold cash in your RRSP or non-reg accounts, and move a portion of your equities into the TFSA, while keeping your current asset allocation.

Of course, equities can drop in value whereas cash cannot (ignoring inflation of course), so perhaps you want to "play it safe" and guarantee that you can claim potential capital losses by keeping equities in your non-reg account. That's fair--it's a personal preference thing depending on how you feel about your equity holdings. But again, over the long term, the trend is for equities to vastly outperform cash, so chances are you'd be better off with equities in the TFSA (as long as you're investing in relatively "safe" equities, as opposed to risky penny stocks etc).



> Bond yields are taxed at 100%, right?
> 
> I'm striving for tax efficiency, hence putting bonds or HISA (Taxed at 100%) in a TFSA instead of trading stock in a TFSA and sheltering capital gains (Taxed at 50%)


True. However I've always personally felt that so-called "tax-efficient asset allocation" is overrated, or misleading. What really matters at the end is how much you gain in $$ amounts, not the % in tax you pay. I feel that keeping higher-yield equities in the TFSA gives a better payoff--you might be paying a higher % of tax in the non-reg account, but you'll be paying a lower $$ amount in tax. E.g. I'd rather pay 40% tax on my bonds that grew $200 (=$80), than pay 20% tax on my capital gains that grew $500 (=$100). Of course, I still try to optimize tax % when possible (e.g. keeping Canadian equities in my non-reg account because they are taxed more favourably than foreign equities, which I hold in registered accounts).

But again, I guess it's more of a personal choice depending on how you think your equities will perform compared to cash/bonds.

So the short answer is: yes, I would go for the HISA over bonds if I were in your situation. However, that situation simply doesn't apply to me because I prefer equities in my TFSA over both HISA and bonds. (Currently I hold my bonds in my RRSP; however I am actually thinking about moving them to my non-reg account since they have such a low yield there would be only a small amount of taxes to pay, even at 100% marginal tax rate.)


----------



## Kursor (Mar 7, 2014)

I did some crewed quick calculations for taxation comparison both outside tax sheltering:

*Assuming*, HISA/Bond Yield: 3%. Equity Yield: 6%. Principal: $31k, 40% Tax Bracket

HISA/Bond: $930 Interest. *$372 Taxed*. $588 Profit
Equity: $1860. *$372 Taxed*. $1488 Profit. 

If one can earn more than double the HISA/Bond yields, then tax benefit of holding equities in a TFSA would be greater than holding HISA/Bonds in a TFSA.



cjk2 said:


> I'm not suggesting you convert the cash in your TFSA HISA to equities. However, given that equities outperform cash in the long term, it seems more beneficial to hold cash in your RRSP or non-reg accounts, and move a portion of your equities into the TFSA, while keeping your current asset allocation.
> 
> Of course, equities can drop in value whereas cash cannot (ignoring inflation of course), so perhaps you want to "play it safe" and guarantee that you can claim potential capital losses by keeping equities in your non-reg account. That's fair--it's a personal preference thing depending on how you feel about your equity holdings. But again, over the long term, the trend is for equities to vastly outperform cash, so chances are you'd be better off with equities in the TFSA (as long as you're investing in relatively "safe" equities, as opposed to risky penny stocks etc).
> 
> ...


----------



## cjk2 (Sep 19, 2012)

Kursor said:


> I did some crewed quick calculations for taxation comparison both outside tax sheltering:
> 
> *Assuming*, HISA/Bond Yield: 3%. Equity Yield: 6%. Principal: $31k, 40% Tax Bracket
> 
> ...


You're only looking at one year's gain, though. In this case it is true--you end up with $2418 gain either way ($1488 + $930 = $558 + $1860). However, don't forget that in the case of keeping equities in the TFSA, your gain is much higher in the TFSA ($930 more than with the TFSA HISA), less in the non-reg. The higher amount in the TFSA will continue to grow tax-free, and over many years the compounding effect can be substantial.

In other words, each year you would get the same gains on your $31k principal. However, the _interest/capital gains_ would grow at much different rates in the different accounts. To simplify the math, let's look at what happens to just the gains in this one year, 20 years down the road. I'm keeping your assumptions of 3% and 6% growth.

*Scenario 1: equities in non-reg (6%), cash in TFSA HISA (3%)*

non-reg: 31k grows 4.8% (20% tax) = $1488. This amount continues to grow at 4.8% annually. After 20 yrs, you get $1488 x (1.048^20) = $3800.
TFSA: 31k grows 3% = $930. This amount continues to grow at 3% annually. After 20 yrs, you get $930 x (1.03^20) = $1680.
*Total: $5480*

*Scenario 2: bonds in non-reg (3%), equities in TFSA (6%)*

non-reg: 31k grows 1.8% (40% tax) = $558. This amount continues to grow at 1.8% annually. After 20 yrs, you get $558 x (1.018^20) = $797.
TFSA: 31k grows at 6% annually = $1860. This amount continues to grow at 6% annually. After 20 yrs, you get $1860 x (1.06^20) = $5965.
*Total: $6762*

Again, this is only looking at 1 year's worth of interest/gains, 20 years down the road. When you add it up year after year, or go further into the future, the gap continues to widen.

(By the way, even if you assume bonds in a non-reg return 2%, or even 0%, scenario 2 is still the winner, because in this case, the final growth in the TFSA alone ($5965) is greater than the combined final growth in scenario 1 ($5480). This is keeping the assumption of 3% growth in the TFSA HISA of scenario 1.)


----------

