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Discussion Starter #1
I am looking for feedback on the current attractiveness of investment grade Corporate bonds with longer term maturities. Relative attractiveness of current yields versus other fixed income opportunities, and prospects for capital gains? Many tks
 

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Buying long term bonds very much depends on your outlook for interest rates and inflation.

As rates rise bond prices tend to come down. As we are currently at a low in the interest rate cycle, looking out longer term it's safe to think rates will be going up and prices should come down as a result.

Buying now would most likely lead to capital losses and not gains! Factoring in the way inflation, if it rears its ugly head, would eat into your returns and you probably want to stay shorter on your bond laddering.
 

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I agree that bonds are attractive due to the wide spreads, which are coming down fast as the fear factor recedes. But with interest rates likely to rise, capital gains may not last long.

I stay with fairly short maturities, the recent 5 year issue by BAM at 9% is an example. There are also some good convertible debentures trading on TSX with good yields; they are mostly not investment grade, but are easier to trade.

http://www.financialpost.com/markets/market-data/bonds-debentures.html?tmp=debentures
 

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If your considering five years as long term than sure. If your thinking in actual long term numbers than I wouldn't be jumping all in. Average duration on my corporates is in the six year ballpark.
 

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Discussion Starter #5
Thank you Janbjarne for the recommendation on debentures. I am not familiar wih this investment vehicle. hat are the risks on these other than the credit risk? tks
 

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I stay with fairly short maturities, the recent 5 year issue by BAM at 9% is an example. There are also some good convertible debentures trading on TSX with good yields; they are mostly not investment grade, but are easier to trade.
http://www.financialpost.com/markets/market-data/bonds-debentures.html?tmp=debentures
I had my eye on the 5 year BAM issue with the attractive 9% yield. It was offered at the end of May but realized I needed a minimum $500,000 investment. Do you see anything in the convertibles that are a good buy at this time? Thanks.
 

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While corporate bonds have a healthy spread over government bonds, make sure that you have a portfolio of corporate bonds to mitigate the credit risk. I personally have only 20% allocated to bonds and the bond portion being small, I avoid corporate bonds entirely, preferring to take market risk instead. YMMV.
 

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Thank you Janbjarne for the recommendation on debentures. I am not familiar wih this investment vehicle. hat are the risks on these other than the credit risk? tks
The credit risk for many convertible debentures is considerable. Most are issued by income trusts, which are inherently strapped for capital. So many debentures were down dramatically in the fall when it was impossible to raise capital. If the company defaults, the debenture could be worthless. If the company is still listed when the debenture matures, the debenture may be paid out in trust units rather than cash, so it is much safer than holding the income trust units themselves. The stability of the company is key.

As with all bonds, there is interest rate risk. Rates go up, bonds go down. I would stick to maturities below 5 years.

To TOJO:

Some of the more stable would be LIQ, PRQ, BNP or RSI. For potential capital gain, but higher risk HTE or ENT. I am not recommending anything.

Incidentally, the BAM bond issue was available in minimum $5000 investment. I asked for $10,000 and was lucky to get $6000. It now trades at a significant premium.
 

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Incidentally, the BAM bond issue was available in minimum $5000 investment. I asked for $10,000 and was lucky to get $6000. It now trades at a significant premium.
Thanks for the info janbjarne...

Did you get in as a new issue? 9% for five years in my RRSP would have been nice. The issue was closed by the time I made a decision to pursue it - just as well as I'm a bit overloaded with BAM preferred shares already.

Interesting thing about the BAM 9% notes per the prospectus is that they are redeemable by BAM at any time.
 

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tojo,
Actually, call provisions like this on corporate bonds are fairly common. When interest rates fall, the risk of the issuer calling the bonds increases because they may be able to refinance their borrowing at a lower yield. The investor is typically compensated for this risk with a higher yield to maturity. If you invest in bonds with call provisions, you should read the prospectus carefully (the relevant documents for existing issues may be found on SEDAR). Some issues give the investor some prepayment risk protection by preventing the issuer from calling the bonds for a fixed period of time. Others, like this BAM issue, give the investor no prepayment risk protection at all.
 

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tojo,
Actually, call provisions like this on corporate bonds are fairly common. When interest rates fall, the risk of the issuer calling the bonds increases because they may be able to refinance their borrowing at a lower yield. The investor is typically compensated for this risk with a higher yield to maturity. If you invest in bonds with call provisions, you should read the prospectus carefully (the relevant documents for existing issues may be found on SEDAR). Some issues give the investor some prepayment risk protection by preventing the issuer from calling the bonds for a fixed period of time. Others, like this BAM issue, give the investor no prepayment risk protection at all.
I knew there had to be a catch for such a nice yield. The 9% yield is really meaningless if the issue is designed to be called at anytime. Given the current environment of falling spreads, this will surely be called in the near-term for refinancing at a more attractive yield for the issuer. For anyone who may be working with a fixed income plan or a bond ladder that included this issue, a call would be a major inconvenience requiring some re- planning or rethinking of their strategy :mad:.
 

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Yes, I got the BAM bonds as a new issue. If I recall, it was only open for an hour or so. The bonds can be redeemed prematurely, but BAM must pay a premium based on the Canada bond yield, so you don't lose the 9% yield. They can also be redeemed in case of a take-over.

Good luck with your BAM preferred shares, Tojo. They are climbing rapidly as confidence returns, and have appreciated much more than the common stock.
 
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