[l1quidfinance]

Good people of Cmf. Let's talk bond funds.

Are you adding new money at the minute? I'm talking XBB, VAB etc. My theory is stick with it. Keep the asset allocation as per my original plan.

I'm interested in the views out there.

 

[doctrine]

I sold the last of my bonds in Mar 2020 at prices about 10% higher than today. Bond yields are really soaring. 2.5% on a 5 year GoC bond, that is a 10+ year high interest rate. Maybe it makes sense to average in given that move, if it is part of your strategy. In a world of 5-8% inflation though, a 2.5% bond does not seem in line with reality.

 

[peterk]

Just bought some VCNS today, which is 60% bonds.

Perhaps bonds will go lower still, but I'm overweight stocks, and 3% from bonds seems decent. If bonds drop even more I'll buy more.

I'm a bit iffy on the CBs stepping on the brakes to reign in inflation. I think they'll chicken out with going all the way, and at the same time governments will step in with some weak promises about subsidies and affordable this-and-that, and maybe even some toothless price-fixing. But it will be enough of an excuse not to raise rates to where they need to be.

 

[james4beach]

Are you adding new money at the minute? I'm talking XBB, VAB etc. My theory is stick with it. Keep the asset allocation as per my original plan.

I only hold bond ETFs in my RRSP, and I already made my contribution a couple months ago but yes I did buy XBB then. If I was doing my contribution today, I would absolutely buy it.

Instead in non-registered, I'm buying GICs but it's really the same idea. Yes rates might be going up, but that only makes the bonds (or GICs) more attractive. The yields are better.

We have no idea where inflation or interest rates will be next year. I don't change my asset allocation plan based on guesses at inflation.

 

[m3s]

Bonds down nearly $1T this week. Down nearly $5T from ATH

When every monkey blindly believes you should just hold 40-60% of their portfolio in an asset being propped by central banks.. look what happens when that ends and rates climb

Just look at what happened to bonds in March 2020 and during the stimulus. Could drop another $10T without central bank manipulation

 

[Covariance]

Good people of Cmf. Let's talk bond funds.

Are you adding new money at the minute? I'm talking XBB, VAB etc. My theory is stick with it. Keep the asset allocation as per my original plan.

I'm interested in the views out there.

I am short duration. And have been for some time. That said I do not recommend people play this way unless they have the time and inclination. A diversified low cost passive portfolio with a sound asset allocation that one actually follows, rebalances back to is proven to work in the long run.

 

[nathan79]

I'd rather just hold cash. Bond yield may be slightly better, but comes with less liquidity. If I decide to buy a house and need the money but my bonds are worth less, that would suck.

 

[peterk]

I'd rather just hold cash. Bond yield may be slightly better, but comes with less liquidity. If I decide to buy a house and need the money but my bonds are worth less, that would suck.

Sure if you have a specific purchase at a specific time, like an upcoming house buy, then maybe bonds aren't for you. But if it's just nebulous future need for "investing", "rebalancing" or "buying opportunities" then probably bonds will be better in the end, most of the time. They certainly haven't been recently, though.

 

[robfordlives]

I dunno as a long timer 60/40 in the past and lately 70/30 guy I have not been surprised or worried with the bond carnage. To me if you sell now you are doing the opposite of buy low sell high. Most bond funds have priced in about ten 0.25% rate increases. I think we see around twelve total taking us to a terminal rate of about 3.5%. In other words most of the pain is baked in and if you hold that bond fund to it's maturity based on today's date you will be made whole with nice bump in quarterly payouts to make up for this. I don't think we will see crazy high rates ever in our lifetime again; 1) Inflation cannot be this high for much longer 2)every rate hike cycle over the last 40 years has resulted in a lower terminal rate than the previous rate hike 3) Rates much higher than that will crater the housing market - we already are seeing a massive impact on pricing in the GTA area just in the last few days. Virtually zero buyers at these rates versus lines out the door a week ago.

 

[m3s]

Your point 2 and 3 contradict point 1 from the time horizon of anyone younger than boomer

If raising rates are what control inflation and yet rates are trending down for decades because the markets cannot handle raising rates

We have been kicking the can down the road but eventually we have to face the underlying issue.

Of course the boomers in charge are not worried. The timing is perfect for them

 

[nathan79]

Sure if you have a specific purchase at a specific time, like an upcoming house buy, then maybe bonds aren't for you. But if it's just nebulous future need for "investing", "rebalancing" or "buying opportunities" then probably bonds will be better in the end, most of the time. They certainly haven't been recently, though.

It's pretty hard to set a specific time for a house purchase nowadays. You are pretty much a hostage to the market, unless you have a very high income. I've been saving for 9 years now and just hoping for the right opportunity. Otherwise, I'll just keep plenty of cash as dry powder while putting the rest in equities/crypto for some growth. Bonds are for people who have reached a stable position in life.

 

[TomB16]

I owned bond ETFs for a few years. It got old, reading the most recent reason the ETF was significantly down just when I needed it the most.

Bond ETFs are not the same as bonds. Not even close. Do not have the same purpose (I don't know what the purpose is for bond ETFs, other than to make owners feel secure when they are not).

I've since held corporate bonds. Nothing against them. We sold all of our bonds in 2020 when the market was down and bonds were way up. It was the perfect swing trade.

If you look at XBB for March 1, 2020 (the start of the COVID correction), you will see XBB crashed at the same time as the equity market. If it's going to do that, I might as well own a REIT that pays me 6~8% every month and also appreciates. If we had owned XBB, instead of corporate bonds, we would not have had the massive COVID booster shot.

 

[AltaRed]

Actually BBB rated (at least anything rated under A) corporate bonds in particular were the reason for the March 2020 crash in bond ETFs and for some period in March 2020, one could not buy or sell a corporate bond. Nothing showed on bond inventory at at least some discount brokerages for many days during that period. The only bonds that really held their own were government bonds.

There is a life lesson there. IF you are going to hold bonds as a foundation of stability in your portfolio, stick with government bonds, or at least those corporate issues rated A and above. BBB and below will behave more like equities......for justifiable reasons.

 

[TomB16]

Actually BBB rated (at least anything rated under A) corporate bonds in particular were the reason for the March 2020 crash in bond ETFs and for some period in March 2020, one could not buy or sell a corporate bond. Nothing showed on bond inventory at at least some discount brokerages for many days during that period.

I swear, people on this site would argue the sky is green. You are a credible person and I'm sure there is something to your narrative but it simply does not reflect my reality.

My junk bonds and debentures sold like Russian/Ukrainian translation dictionaries in Kyiv during the COVID correction.

My NWH.DB.G sold for $108.50 on March 2, 2020. That is an 8.5% premium, plus I got the prorated interest. I seem to recall NWH.DB.G was tagged with a 3B rating, as were the other debentures and bonds I held, at the time. That's why I correctly called them junk.

That morning, I also sold another series of debentures and some bonds.

While I'm here, let's have a look at XBB vs S&P 500 during the COVID correction.

 

[TomB16]

BTW, the money was immediately pumped into NWH-UN common shares which were forward yielding around 12% at $6.71.

I understand the common shares will stop distributing long before the debentures default but, even if they stopped distributing for a year, I knew I would be well positioned.

It was a strange time for us. I was still working, I wanted the bonds/debentures heading into retirement but I could not resist converting the debentures into common stock at a rate far, far better than the debenture conversion rate and take a big goose to our dividend income while we were at it. From memory, the debenture conversion price was something like 17 bucks so we tripled our money over a potential debenture conversion.

I am not an active trader, to say the least. I pride myself on doing nothing, almost all of the time. Being patient does pay off sometimes and this was one of those times. If I had held XBB, we would have had noticeably less retirement income right now.

I'm not providing advice to anyone. Enjoy your XBB. I just don't see the purpose of holding an ETF that floats with the market and pays less than holding bonds themselves. It literally takes away 100% of their value, from my perspective.

 

[AltaRed]

Not sure what your points are in your last 2 posts? NWH.DB.G is not a bond... never was. Convertible debentures are a different animal to bonds. I watched both the government and corporate bond market in March 2020 fairly closely to understand the dynamics so I have no idea what you are talking about. Govt't bonds held their own. Corporate bonds, especially lower rated ones, tanked and stopped being priced for at least a week best I can recall. This subject was discussed extensively at the time in forums like CMF and FWF. Of course, they then recovered as your plot depicts.

XBB is a mix of government and corporate bonds, a good portion of them BBB corporate bonds that you can up up yourself . XBB had huge spreads during March 2020 because many of the corporate bonds couldn't be priced and ETF providers like Blackrock were challenged to find appropriate NAVs each trading day. Bottom line: XBB and counterparts like VAB and ZAG, are not the bond ETFs most thought them to be.

P.S. I don't hold any bond ETFs directly, but do hold a bit via VCNS in my RRIF. Plus I hold a few stand alone bonds as well. Telus, Capital Power, Enbridge as examples.

 

[james4beach]

XBB is a mix of government and corporate bonds, a good portion of them BBB corporate bonds that you can up up yourself . XBB had huge spreads during March 2020 because many of the corporate bonds couldn't be priced and ETF providers like Blackrock were challenged to find appropriate NAVs each trading day. Bottom line: XBB and counterparts like VAB and ZAG, are not the bond ETFs most thought them to be.

Well they are bond ETFs with some BBB corporate exposure. Those are higher risk bonds, and that risk showed up in March 2020.

All investments involve some risk.

 

[TomB16]

Not sure what your points are in your last 2 posts? NWH.DB.G is not a bond...

I stopped reading after this. No need.

Unsecured bonds and debentures are essentially equivalent, with the only exception being secured bonds pay before unsecured bonds which pay before debentures in a corporate liquidation.

 

[fireseeker]

My junk bonds and debentures sold like Russian/Ukrainian translation dictionaries in Kyiv during the COVID correction.

My NWH.DB.G sold for $108.50 on March 2, 2020. That is an 8.5% premium, plus I got the prorated interest. I seem to recall NWH.DB.G was tagged with a 3B rating, as were the other debentures and bonds I held, at the time. That's why I correctly called them junk.

That morning, I also sold another series of debentures and some bonds.

Congratulations on the exquisitely timed trade.

Your junk bonds and debentures sold richly just before the Covid correction, not during.

Check out a chart for XHB. The week of March 2, 2020, was the absolute peak. The following Monday (March 9, 2020) is when markets began to crash. By March 20, XHB was down 25% and -- as @AltaRed said -- most of the bond market was no-bid.

Things changed quickly, of course. You did brilliantly by selling the debentures high and shifting into a riskier asset that surged thanks to the massive stimulus.

So, your point that bond ETFs holding corporates may be undesireably correlated with stocks is well taken.

I also concur with @AltaRed's point that if you want crash insulation, GoC bonds will do that. XGB, for instance, barely budged during March, 2020.

 

[TomB16]

Congratulations on the exquisitely timed trade.

Thank you. It was luck. I have absolutely no ability to trade and make money. My gut is a moron.

I was prepared to hold those debentures to maturity which, as I recall, was 2024. I also sold some bonds that matured about that time and another series of debentures that matured at the end of 2022. The point of bonds and debentures (again, practically the same thing but with a slightly different risk profile) is that I would have gotten back every penny of capital plus interest, if I had held to maturity.

Someone gave me almost the entire coupon value of the 2022 debentures 2.5 years early. Weird.

Your junk bonds and debentures sold richly just before the Covid correction, not during.

Check out a chart for XHB. The week of March 2, 2020, was the absolute peak. The following Monday (March 9, 2020) is when markets began to crash. By March 20, XHB was down 25% and -- as @AltaRed said -- most of the bond market was no-bid.

I suppose the markets starting to crash on March 9 is a point of view but Yahoo and I were there at the time and we see it a bit differently.

The light blue line that begins to plummet on February 21 is the S&P 500. The lower, darker, line is XBB.