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For comparison, here were the % drops from the start of 2020 to their lowest points during the crash:

XGB and ZGB were positive the whole time YTD
XBB -8.8%
VAB -8.3%

XCB -18.9%
XHB -23.1%
XIC -33.8% (stocks)
XRE -41.5% (REITs because Tom mentioned them)

There is a big difference in magnitude of losses among these. On this scale, the safest instruments were government bonds and XBB/VAB.
 

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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.
To me this is like saying a rainforest is like a desert, one is just wetter than the other. NWH.DB.G is a convertible subordinated instrument. This puts it in the "mezzanine" area of the capital stack, between debt and equity. I dont think I've ever heard anyone refer to a subordinated convert as essentially equivalent to a vanilla senior bond (whether secured or unsecured). The risk profile is different, so is the return. The senior creditors (which includes trade creditors) all get priority in liquidation but the convert has a participation in equity upside. To price it properly one needs to run a cash flow analysis like in normal credit underwriting and also value the conversion premium (which is basically a call option that triggers on whatever events are specified in the debenture docs). Depending on the instrument, it can be helpful to think of it in reverse terms, as an equity with a degree of downside protection in the form of say a liquidation preference (like pref shares).

Btw I had a quick look at the prospectus out of curiosity and these debentures have a PIK (payment in kind) feature as well, meaning the issuer can opt to pay principal at maturity in REIT Units instead of cash. This makes the instruments even more equity like, although I think the main pain there is the dilutive effect on other unitholders (assuming there is an active secondary market on which the PIK units can be dumped for cash without too much slippage, not sure how safe this assumption is).

Eyeballing the charts for NWH.DB.G and NWH.UN, I think what happened with the debentures in Feb / March 2020 was just equity vol muted by the debt like aspects of the debentures
 

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To me this is like saying a rainforest is like a desert, one is just wetter than the other. NWH.DB.G is a convertible subordinated instrument.
The bonds I sold on March 2 were convertible.

I understand most bonds do not convert and many debentures do convert but that is a function of the contract on the note, not the instrument itself. Debentures do not have to convert, by definition, and some do not. The only fundamental difference between bonds and debentures is the liability payout sequence on liquidation.

Debentures and bonds serve the same function in a portfolio whereas bond ETFs do not. Bond ETFs can technically lose capital forever, although I have never seen it happen, due to market maker overhead. A bond or debenture will return the full capital on maturity as long as the company remains solvent.

I believe what is going on here is a few people are trying really, really hard to "be right". I'm here to exchange ideas and have little patience for alpha crap, particularly when it is an attempted beat-down that is based on incorrect information. I've written facts. Readers can judge for themselves who is right and who is wrong. Anyone who wishes to exchange ideas with me (the reason I am here) is welcome and invited to do so. This includes if you feel I am wrong about something. No problem. Those who wish to "correct" me (perhaps based on some self view of alpha leadership) are advised to make some effort to be factually correct.

Consider this:

Joe Investor with $1M nest egg buys $20K worth of bonds yielding 4% which mature in 7 years.

Jane Investor with $1M nest egg buys $20K worth of debentures yielding 5% which mature in 7 years.

Each instrument is a promissory note to return capital plus coupons that mature on interest payment dates.

Assuming the company remains solvent, these two positions perform the same function in a portfolio. If the debentures convert, there is potential opportunity for increased yield from the debentures but the conversion ratio is rarely achieved in a stable company, like a REIT, so this is unlikely to factor. Also, conversion is not a feature unique to debentures, as it is sometimes seen in bonds.

Debentures clearly fall in the bond class. Asking specific questions about debentures at your broker will likely yield a bunch of disinformation at your broker until you are eventually escalated to a bond trader who will answer without effort. The same goes for bonds but, for some reason, many people in the financial industry don't seem to understand debentures.


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.
Bond talk was requested. Mr. l1quidfinance is interested in views. I shared mine.
 

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BBB are investment grade. Lowest level of IG is BBB-
High yield (junk) starts at BB+ and goes lower (B, CCC, CC, C etc)
Fair enough. I've always considered BBB to be junk, perhaps a factor of a business partner from the 1980s who seeded most of my core investing knowledge. Although, I know a couple of others who hold the same view.

Kind regards.
 

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I will mention, since it is relevant to the original discussion, I held some of the NWH 6.5% yield debentures. Bonds were not top of mind for us, at the time, but it was a really strong offering so I expressed interest.

That series was bought back by NWH so we didn't hold it to maturity. This is a liability of this investment class. Any of the contracts I've read in the last decade have included a clause which gives the right for the company to buy back the notes.

Shortly after that purchase, I decided to build a 5 rung bond ladder. That ladder was never completed. Two years later, we had three rungs (another IPO and one series purchased on the secondary market) before NWH bought back our first tranche, leaving us with two. One other bond tranche was purchased on the secondary market after this.

Holding bonds is messy, compared to buying an ETF. If you need an organized ladder with perfectly structured maturity and are careful who you loan money to, as I am, bonds are extremely difficult. There was a period of 18 months in which no bonds of interest were offered. We never did have a perfect ladder with something maturing every year but it was good enough for us and there was always the option of selling into the secondary market.

I came to realize I would not consider owning a bond from a company which I would not consider owning common stock. If management is good and the business is stable, I would own either instrument so the bond/debenture would have to pay more than the common stock yield to make it interesting. In the case of NWH, it did not but I bought anyway. We would have been served as well or better with common shares.

At this point, I doubt I will ever buy bonds again. We use a pair of GICs as insurance against sequence of return risk. The reason I did not choose to use a bond ETF is cited above.
 

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tbh i dont even know what the word "debenture" means. I was just reading through the thread, got curious about NWH.DB.G after reading the exchange and thought after flipping through the prospectus that it was very 'quasi-equity' if you will and thought that was relevant to the discussion.

my choice of quoted text was probably not the best. absolutely a debenture does not have to be convertible or subordinated and it can be secured or unsecured (afaik); in that regard it has the same meaning as bond. I was really talking specifically about what i will call super junk subordinated converts
 

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Fair enough. I've always considered BBB to be junk, perhaps a factor of a business partner from the 1980s who seeded most of my core investing knowledge. Although, I know a couple of others who hold the same view.

Kind regards.
No worries. There are definitions from the bond rating agencies, and then we have our own views of what's good or bad. When people look at a rating on a bond ETF website etc they will see the official definition so it's good to keep in mind.
 

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So for the people pushing VBAL here all the time do they really understand that 40% is invested in bonds, many high risk BBB??? I own ZAG and some other bond etf's and am perfectly fine taking a drubbing at this time. Selling any bond etf now would literally be selling at the bottom or near bottom. 10 rate hikes are priced in to most bond etf's....it is complete insanity to think we will have much beyond that with the trillions of $'s in debt on everyone's balance sheet. I think ZAG will hit $14 at the absolute bottom which will be approx 3.5% div yield at that point. Yes please!!!
 

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I’m reminded of the old saw, no matter bad things seem, tomorrow they can get worse.

Personally I am not buying bonds or bond funds. I do have a few years of expenses in a mix of loonies and greenbacks as working capital and simple volatility hedge, but have no interest in deeply negative yielding fixed income. I do not think the risks are adequately priced and have noticed even establishment types saying the quiet part out loud: Markets are pushing Fed into developing economy territory. Admittedly I have always been preoccupied with inflation / devaluation risk and maybe this leads me to a suboptimal way of thinking about risk and return. Anyway, I just don’t see the value proposition
 

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What is the likelihood of the annualized inflation rate returning to 2 - 2.5% in the next 18 months? I realize most of the increase in costs are on fuel, related to fuel costs and larger less frequent expenditures (ex. vehicles and housing). 50 bps hikes are not common but in this case I think necessary for not acting earlier. IMO the rates should have been increased in 2021 when inflation exceeded the targeted rate and again jan 2022 at the latest but we can't change the past. More concerning to me is the yield curve inversion and the pending recession it typically indicates. The decision remains as to whether investors will move into bonds in a major way. Pension funds are typically guided by preset allocations and as such will move money accordingly. I don't want to see double digit interest rates but I don't see me getting serious about bonds until rates are high single digits. I may start to start watching at 5%.
 

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Absolutely no idea. That's why I stick to my 5 year GIC ladder strategy. I just don't know what will happen, other than a 5 year ladder is better than a 3 year ladder that seems to be the preference of the day.
Right. It could go either way, but 5 year GICs nearly always yield more than 3 years, which in turn yield more than cash.

I will continue buying 5 year GICs this year. I really don't see why not.
 

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I also have a very small 5 yr ladder that I have considered winding down. I have not added to it in years but as each rung comes due I roll it over. Due to its small weighting (each rung is less than 1.5% of portfolio) it seems to be more of a hassle to move to my brokerage than to let it idle along. Unless rates continue to climb it will continue to take up less space in my portfolio. At some point when I move to decumulation a larger ladder may better serve a cash wedge for me.

To answer my own question, I am speculating that inflation rates will not get back in range in that time frame. Whether or not the central banks have the stomach to reign in inflation by raising rates is unknown as events can change future action. It has already been proven that target inflation rate is less important to rate changes than it once was. In so doing they may cause more disruption to the economy. A soft landing although possible seems unlikely without a recession.
 

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I really don't see this as an outrageous possibility. Not 50% probability, but much greater than zero.
One should always be cautious in "overcrowded" trades. Absolutely everyone these days is worried about high inflation, and everyone wants investments that do well during inflation.

This kind of situation tends to result in the market under-pricing the alternative scenario. A position in bonds would benefit from moderating inflation.
 

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One should always be cautious in "overcrowded" trades. Absolutely everyone these days is worried about high inflation, and everyone wants investments that do well during inflation.

This kind of situation tends to result in the market under-pricing the alternative scenario. A position in bonds would benefit from moderating inflation.
It goes back to the old "buy low, sell high". And most people actually doing the opposite by reacting too late.
 

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I buy bonds via XBB. I'm sticking to my pre-determined asset allocation. Right now bonds are down, so that means I buy more.

Today bonds aren't matching inflation. But I don't know what'll happen in the future to bond prices, inflation, equity prices, my personal working income, or anything else. So I just do the couch potato thing. I stick to my plan and buy what's down. Today that means bonds.

My portfolio is a long-term investment. Hopefully, I won't need to touch the money for another twenty or thirty years. Over this time frame, lower-yielding bonds inside XBB will mature and automatically roll into the rates of the day. So I try not to stress about short term pain.

It's a "dumb" approach and lazy, but it's what I do.
 

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One should always be cautious in "overcrowded" trades. Absolutely everyone these days is worried about high inflation, and everyone wants investments that do well during inflation.

This kind of situation tends to result in the market under-pricing the alternative scenario. A position in bonds would benefit from moderating inflation.
Bonds have been an overcrowded trade for a long time because everyone bought into the 40-60% bond allocation "rule".

Then you have the central banks buying bonds to lower interest rates. They are literally manipulating the bond market and people put 60% of their wealth into that

As a contrarian I could see now being a good time to buy some bonds but it hasn't been a good trade for a long time. The upside potential is capped by central banks

There are much better places to store dry powder imo.
 
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