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I think this is great James what you're doing here in this thread to document what you're doing with buying individual bonds so the rest of us can learn.
I'm just catching up on this thread so my appologies if you've already said before what broker you recommend for buying individual bonds .
I recall you saying earlier that you trade with IB. Have you been using IB for trading bonds? If not what broker do you recommend?
I'm currently looking at IB as a broker and considering buying a bunch of individual bonds like you've been doing here.

I find it amazing in this day and age of technology that retail bond trading is so far behind. It lacks transparency and the mark ups are absurd.
I can buy 1000 or 100,000 in stock for $7 instantly with just a few pennies wide on the bid/ask spread with live quotes.
Options may have less volume but the US fees are $5 and some have pennies wide on the spread with live quotes.
The bond market is larger capitalization than stocks but bonds at most of the big banks are still OTC markets, not live quotes, charge large markups of nearly 1% etc
Paying a broker $85 commission in the spread for a 10,000 bond investment seems ridiculous.
Its odd that the retail trader experience for this lower risk investment class remains so far behind.
 

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Pick a brokerage with transparency, e.g. one that specifically provides the bid/ask spread and charges, for example, $1/$1000k of face value with a $24.99 minimum like I do.

P.S. I always buy in $20-30k increments.....
 

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Pick a brokerage with transparency, e.g. one that specifically provides the bid/ask spread and charges, for example, $1/$1000k of face value with a $24.99 minimum like I do.

P.S. I always buy in $20-30k increments.....
Any specific recommendations of which brokers? I'm guessing Scotia iTrade or Qtrade?
Also, its worth comparing the brokers Bid /Ask spread quotes to IB, Candeal, and PFIN/CBID to to see how fair or competitive their prices are compared to the live spot price at the exchanges.
 

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Discussion Starter #167 (Edited)
I'm using Scotia iTrade for all my individual bonds. Over the years I have compared their inventory and pricing (considering total free structures of both) with TD and found iTrade was better for the government bonds I buy, typically in units of 20K and up. The iTrade fee structure is transparent at $1 per 1K face, with $25 minimum.

From what I can tell, their quotes are based on PFIN/CBID. For example, iTrade's quote for the 2028 benchmark government bond is ask=100.403 which is the same as the public quotes on the PFIN page... rather, it's actually a hair less at iTrade than the PFIN page shows.

I have not compared to Interactive Brokers.

I think this is great James what you're doing here in this thread to document what you're doing with buying individual bonds so the rest of us can learn.
Thanks. Going through this exercise has more or less eliminated my fear of fluctuations and volatility in bond prices (this is a common fear as you know). Since I hold the securities to maturity, I won't be forced to ever have a loss. I see the prices fluctuate but it doesn't matter. The yield for each security is locked in and guaranteed at the moment I buy it, plus liquidity and the option to redeploy or ride the yield curve, if it's steep enough.

Here's a chart of my current ladder. I would like to fill in more 10+ year bonds but currently, GICs have significantly better yields. I treat this as one big ladder with bonds and GICs sprinkled throughout it (where bonds provide liquidity).

maturity.png
 

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Yes, it is Scotia iTrade. As James alluded too, market prices change continuously so any comparisons on the same issue, or virtually identical issue, has to be done quickly, e.g. same day. That is understandable since the yield curve changes daily. Like James, I don't care since I lock in the yield to maturity and let the bond mature. For a retail investor, that is all that really matters.
 

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Interesting thread.

Going through this exercise has more or less eliminated my fear of fluctuations and volatility in bond prices (this is a common fear as you know). Since I hold the securities to maturity, I won't be forced to ever have a loss. I see the prices fluctuate but it doesn't matter. The yield for each security is locked in and guaranteed at the moment I buy it, plus liquidity and the option to redeploy or ride the yield curve, if it's steep enough.
James, given your experience, what do you think is the main advantage of maintaining such a bond fund instead of just buying a bond ETF like XBB, ZAG, or VAB? Any drawbacks?
 

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Discussion Starter #170 (Edited)
Interesting thread.
Thanks. Performance continues to be similar to XBB or VAB though I think I'm now a bit behind with this recent big increase in XBB.

James, given your experience, what do you think is the main advantage of maintaining such a bond fund instead of just buying a bond ETF like XBB, ZAG, or VAB? Any drawbacks?
Here are the pros and cons I see of my DIY approach with individual bonds

Pros:
+ total control over each instrument I buy (credit risk, quality, etc)
+ tax optimization, since I can buy low coupons non-reg. But ZDB does this too.
+ avoiding PFIC tax concerns for US Persons, which was a big factor for me
+ ability to sell only bonds close to maturity, instead of selling XBB which sells everything
+ (psychological) assurance of guaranteed yields, eliminates fear of rising interest rates

For the last one I says it's "psychological" because the net result is the same as a bond fund. Everything a bond ETF holds also provides a guranteed yield, but people usually don't think of that. It becomes obvious when you hold the underlying bonds yourself, and their prices also fluctuate. For me it has been helpful holding them individually because it's showed me what actually goes on inside a bond fund. This has almost entirely eliminated my fear of rising interest rates.

It's also given me a new perspective, seeing how great bond funds are. Even in a rising interest rate scenario, they are guaranteed to provide positive returns over the long term. Any price drops are guaranteed to be temporary. This was a hard thing to wrap my head around, but bond funds are an excellent structure.

Cons:
- there's extra work involved; it's much easier buying XBB, ZAG, VAB, ZDB
- it's hard to maintain average maturity for the portfolio. You have to be vigilant.
- I've experienced lower performance because of mistakes I made managing duration
- liquidity is worse than the bond ETF, especially when including GICs in the mix

If I didn't have the US tax (PFIC) concern when I started this, I might have been just as well off using ZDB. When I started I thought I'd be able to get a higher return because of the 5 year GICs in the portfolio. But it turns out that other advantages the bond funds have -- rolling down the yield curve, wider range of higher yielding bonds, professional management -- makes up for the difference, and I tend to do worse than the real bond funds.
 

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But it turns out that other advantages the bond funds have -- rolling down the yield curve, wider range of higher yielding bonds, professional management -- makes up for the difference, and I tend to do worse than the real bond funds.
Could you go into more detail about a wider range of high yielding bonds?
 

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Could you go into more detail about a wider range of high yielding bonds?
Diversification. Bond funds can afford to have a greater percentage of BBB and even BB bonds because of the diminishing effect of any one high yield bond going 'teats up'. An individual retail investor cannot afford the risk of holding individual junk bonds... Remember that 'high yield' is just a fancy way of saying 'junk'.
 

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Discussion Starter #173 (Edited)
Yes the bond funds can afford to have some higher yielding junky or risky stuff. Look at XBB for example, which I consider one of the best bond funds: https://www.blackrock.com/ca/individual/en/products/239493/ishares-canadian-universe-bond-index-etf

No need to guess at the holdings... click to download the full spreadsheet. Let's take a look inside:

If you scroll down column O (the yield to maturity), you'll see them. You've got some Newfoundland 2046 bonds at 2.51% yield. How about Health Montreal Collective 2049 at 3.66%. Or how about Shaw Communications 2039 (those are 20 year bonds!) at 3.99% yield. They even hold some Enbridge 2078 .... note that is 59 years to maturity ... at 5.98% yield. It's probably some fancy corporate bond that is not standard fixed all the way to 2078, something a bit tricky.

If I had a 500K bond portfolio of my own, these would be some pretty insane things to buy. The 30 year Quebec financing bond? 59 year Enbridge bond? No way.

But in XBB's $3 billion portfolio, they can afford to take those risks. They are tiny weights in the portfolio. 75% of XBB is rated AAA & AA, the best stuff. And I've monitored XBB over nearly 20 years and they have consistently managed their risk pretty well, holding mostly the best quality bonds and limiting their corporate & low grade holdings.

Big bond funds have a huge diversification advantage. In my own individual bond portfolio I only hold government bonds (for liquidity) plus 5 year GICs for a yield boost. I don't venture into corporate bonds.
 

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I do differently. I mix in a few corporate bonds of BBB and BBB+ into my 5 year GIC mix. The likes of Enbridge and Fairfax Financial for example. Government bonds can't offer what GICs do so I have not bought any for about 20 years.
 

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Discussion Starter #175
AltaRed, do you find the corporates are liquid enough if you need to withdraw money? The reason I have government bonds is that they are perfectly liquid, virtually no spread to sell. I thought I saw much larger spreads on corporates.
 

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I don't sell them. I let them mature. Longest duration I have bought is 7 years but mostly 5 years to fit in my 5 year ladder.

Added: Meaning 5-7 years left in the bond's term. For example, I hold an old BC Tel bond right now with about a 9.6% coupon. I obviously bought it at a premium but I don't care in my RRSP. My YTM when purchased a few years ago is in the 3% range. Darn good for a Telus bond at that time of low interest rates.
 

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I'm basically a taxable investor, so low coupon bonds get my attention. Is it possible for the individual investor to do better than ZDB with low coupon bonds? Can you have greater tax efficiency with a DIY low coupon bond portfolio, as opposed to ZDB?

P.S. I've come to the conclusion that the best bond exposure I can get is CPP. This assumes that at approximately age 65, my expected lifespan isn't significantly below my peers.
 

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CPP (or any guaranteed and even partially COLA'd annuity) is the best fixed income one can have.

In a taxable account, it is indeed better to use something like ZLB but yields by definition will be low.
 

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Discussion Starter #179 (Edited)
I'm basically a taxable investor, so low coupon bonds get my attention. Is it possible for the individual investor to do better than ZDB with low coupon bonds? Can you have greater tax efficiency with a DIY low coupon bond portfolio, as opposed to ZDB?
ZDB does a pretty good job at it. My bond & GIC portfolio: scaling down to $100 value, the taxable interest for this year will is $1.92.

ZDB: scaling up to $100 value, taxable interest for the year is estimated at $2.10 based on the average coupon rate and monthly distributions. This is just an estimate though. Sometimes ZDB has return of capital, which would reduce taxable interest below the $2.10.

Those numbers are pretty similar. Based on this I think I'd recommend someone go with ZDB for tax reasons unless there are other important reasons they want to bother with individual bonds. I described my various reasons, the benefits in this post.
 

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Discussion Starter #180 (Edited)
After a few years of getting up to speed with this, I think I finally have my own "bond fund" working as I want it. The performance is pretty close to XBB and VAB which means that it's been providing a nice cushion (gains) during this recent turmoil.

My bond portfolio is also reasonably tax efficient as I hold mostly discount bonds, or at least bonds with low coupons.

The big lesson I learned with individual bonds is that you have to manage the weighted average maturity of your portfolio. XBB and VAB are at 10 to 11 years, but my bond portfolio is 7 years. I'm going to keep it at 7 years for a while and see how that goes. Note that this means I have to keep buying longer term bonds as bonds/GICs mature.

This is actually pretty challenging to pull off. The shorter maturities in my bond portfolio are mostly GICs (0 to 5 years) but to get the average up to 7 years, that means you have to buy some really long term bonds too!

For example, I hold government bonds maturing in 2028, 2029, 2030, and 2051. As you can guess, these were not easy to buy. It just feels wrong to buy a 30 year bond, but it's necessary in my case to get my average maturity up to 7 years.

Also interesting... that 2051 bond I bought at 1.6% yield is now the most profitable position in my portfolio. The price is up 17% since I bought it, a powerful response to the recent interest rate declines.

I still like managing my individual bonds, but it's a lot of work and there are many psychological hurdles to get through. I don't think I would recommend this to others unless they are bond enthusiasts. It's pretty hard to maintain a constant average maturity and it's also a lot of work to evenly spread out maturities over many years.

Much easier to just buy VAB, XBB or ZDB (tax efficient)

Basically though, my approach is an extension of the GIC ladder and I find that this is the easiest way to think of it. With a 5 year GIC ladder, you space out your GICs evenly, continually roll over the GICs, and maintain the average maturity at 3 years.

Similarly, with my bond portfolio, I maintain a 10 year ladder, evenly space out the instruments, continually roll over maturing amounts and maintain average maturity at 7 years.

It's really the same process but somehow it feels very different. There's actually a GIC ladder inside my broader 10 year ladder.
 
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