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Discussion Starter #1 (Edited)
Hey folks,

I own a bunch of XBB in my RRSP. Do you think it is going to get hammered by rising interest rates over the next couple of years? While it's hard to predict, "experts" say interest rates should be going up 50 basis points this year.

Weighted average duration of bonds in XBB = ~ 6 yrs. Compare that to XSB = ~ 2.5 yrs. With CAB (Claymore), duration = ~ 4.5 yrs.

Thoughts?

Anyone making their bonds shorter in this environment?
 

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Not sure why you are expressing duration as percentages, those numbers are in 'years' (as the dimension).

If you don't need liquidity, GICs are actually not a bad deal here. XSB offers essentially no yield pickup over a 5 year GIC ladder, and more capital risk. In a taxable account, GICs are also likely more tax-efficient.
 

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Discussion Starter #5
Not sure why you are expressing duration as percentages, those numbers are in 'years' (as the dimension).
You're right Andrewf, I corrected my post.

@Mike - yeah, maybe I should put at least 50% of my bonds in XSB??

I don't believe in a GIC ladder, yet, because I'm still in my 30's. When I get into my 50's, I will probably make a good portion of my bonds in my RRSP, into a bond ladder. I don't see the point of that now since I'm in my accumulation years, not my preservation years. I guess that's also why I have not moved anything to XSB, I've got a good 20 years to retirement.

My Own Advisor
 

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My point is that XSB has a lower yield than a five year GIC ladder right now. So, I don't think XSB is the best course of action right now. If you have a bond allocation, right now GICs are safer, have a higher yield, and are more tax efficient. That won't always be the case. The only reason I see to go with XSB is liquidity. If you plan to hold your bond allocation for five years though, GICs are the way to go.
 

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My point is that XSB has a lower yield than a five year GIC ladder right now.
Not only. There is saving accounts that give you 2% without any risks, and until end of the year interest rates should go up and GIC rates as well.
I hold very smll amount of CLO (at least better dividends than XSB)
 

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Discussion Starter #8
If not XSB, (XSB weighted yield to maturity ~ 2.3%), what is the best GIC laddered product out there right now?

Seems to be good to hold a bit of a GIC ladder in retirement years...
 

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If not XSB, (XSB weighted yield to maturity ~ 2.3%), what is the best GIC laddered product out there right now?

Seems to be good to hold a bit of a GIC ladder in retirement years...
This is tricky part. The best GIC you can find here: http://money.canoe.ca/rates/gics.html

However, my discount brokarege TDW and CIBC Inv Edge don't llow me to buy it.

In CIBC at least you can check what 3rd party GIC they offer:
here is the list for (1,2,3,4 and 5 years rectectivly)
AGF TRUST 1.900% 2.310% 2.700% 3.000% 3.250%
B2B TRUST 1.600% 2.250% 2.700% 3.000% 3.350%
Canadian Western Bank 1.750% 2.300% 2.750% 3.000% 3.350%
EQUITABLE TRUST 1.860% 2.200% 2.900% 3.000% 3.250%
HSBC BANK 1.600% 2.150% 2.600% 2.950% 3.200%
ICICI BANK CANADA 0.900% 1.600% 2.150% 2.800% 3.100%
LAURENTIAN BK 1.600% 2.250% 2.700% 3.000% 3.350%
MANULIFE BANK 1.650% 2.150% 2.700% 3.050% 3.350%
MAPLE TRUST 1.550% 2.300% 2.700% 3.000% 3.300%
MONTREAL TRUST 1.550% 2.300% 2.700% 3.000% 3.300%
NATIONAL BANK 1.450% 2.050% 2.500% 2.900% 3.250%
NATIONAL TRUST 1.550% 2.300% 2.700% 3.000% 3.300%
PACIFIC WESTERN BANK 1.980% 1.950% 2.400% 2.750% 3.000%
PEOPLES TRUST 1.600% 1.850% 2.250% 2.500% 2.750%

In TDW you must call to inquire.

I wouldn't advise to buy GIC for long period now, as rates should go up at some point
 

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One thing to watch out for with GICs is withdrawal/transfer penalties. If, in a couple of years, GIC rates start lagging bonds again, the extra return that you've earned on your GICs does you no good if you pay even more back to the credit union when you want to transfer your money back to your brokerage.

Edit: Obviously this does not apply if you purchase a GIC in your brokerage account, but as mentioned above most brokers don't seem to offer the highest rate GICs.
 

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Discussion Starter #11
Thanks Rysto and gibor.

Again, I'm a big fan of my XBB product, just a little nervous about bond rates moving this summer and thus, trying to decide how short to go with bonds.

I've got a good 20 years until I'm financially secure (I hope?) to retire.
 

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The Bogleheads' wiki has a great article on bond funds and individual bonds that I think is worth quoting here:

t's useful to focus on the duration of your bond fund, such as the Vanguard TIPS Fund, which currently has a duration of 5.0 years. William Bernstein provides an insightful definition of duration as the "point of indifference" for the owner of a bond fund in dealing with interest rate changes. If interest rates rise after purchasing a bond fund, the NAV of the fund falls, which hurts the investor. However, the dividends that the bond fund throws off can now be reinvested at a higher rate. The duration is the length of time that an investor needs to hold the fund for the increased yields to compensate for the decrease in NAV. In that sense, duration represents the length of time it would take for the total value of the fund, with dividends reinvested, to be worth exactly what it would have been worth had interest rates not risen.
(bolding mine)

With all of the talk about the coming bond Armageddon, it's worth pointing this out. In the short term, bond funds (and individual bonds) will go down in value as interest rates rise. However, absent any defaults they are still going to throw off interest payments and the underlying bonds will be paid off. A bond fund drops in value when rates rise because the opportunity cost of investing in the fund has increased. The fund isn't any worse of an investment in absolute terms, it's just that better ones are now available. So long as no bonds default, you aren't going to lose money (in nominal terms) as long as you continue to hold the fund. You just might not make as much money as your could have. So if you're going to hold for the next 20 years, don't freak out. Everything will be fine.

For reference, the weighted average duration of XBB is 6.13 years(as shown here).
 

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The Bogleheads' wiki has a great article on bond funds and individual bonds that I think is worth quoting here:
i agree, very good article, thank you

so the answer is to hold one or more funds with a duration that matches your need or needs for the money ..

like XSB with half and XBB with the other half as an example ...

if you hold for the full duration of the fund you are getting the "equivalent" of buying individual bonds ...

as far as GIC's go, the very best 1-year rate is 2.50 from maxa credit union in manitoba .. you get a provincial rather than a federal guarantee though .. (if that means anything)

not really worth locking in at 2.5% when you can get a cdic insured hisa at 2% though
 

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Thing is, there are 5 year GICs that dominate XBB. XBB has a duration over six years and a lower yield than currently available 5 year GICs at 3.5%. And it's less tax efficient to boot, since it has higher coupons than the yield, holding premium bonds, and thus will result in higher income offset by capital losses.

XBB is vulnerable to default, and GICs are backed by the full faith and credit of the government of Canada.

I hadn't looked too closely lately, but it's becoming clear that bond funds are not a great way to go right now.
 

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If you're looking for a short term bond fund with a little extra yield, I'd recommend Claymore's Short Duration High Yield ETF (CSD TSX). It yields around 7% right now, but only holds bonds that mature in the next year.

There's only 14 issues, so it isn't the most diversified fund in the world. Most of the issues are American, and I'm not sure if the fund hedges the currency or not.

I'd recommend someone spent some time with the prospectus before buying this one. Actively managed ETFs aren't my favorite thing in the world.
 

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It targets a duration of one year, but some of the issues mature as far as three years out. This fund also uses a forward structure so that the returns are all return of capital and capital gains. I'd say this is one of the more interesting ETFs I've seen in the Canadian fixed income space in a while. Jury is still out on how well it does on capital preservation, with its high concentration.

High yield bonds is one area where I can see a reasonable case for active management. The fees are also pretty low for an actively-managed ETF, at 0.55 ish.
 

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I own bonds strictly for diversification. Also, as Mike points out, you don't get much of a return boost for the increased risk in medium and long bonds. Therefore, I own XSB for my bond portion. I fully realize a GIC ladder could provide a bit more in yield compared to XSB but for me liquidity is very important. A compromise could be to own 50% in XSB and 50% in a GIC ladder. You can get about 2.6% with a GIC ladder of 1 to 5 years. XSB yields about 2.1%. Depending on your portfolio size and how much you allocate to bonds, the 0.5% difference may or may not be meaningful.
 

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C C: A lot depends on how you look at it . Yahoo Fin. would have you believe that yield for XSB is about 4% where they just take the disributions and compare them to the AV. Right now it would be about 3.38 % minus the MER of 0.25% or about 3.13 % . However if you use YTM where you calculate what you would earn per year if you held all the underlying bonds to maturity it would be about 2.37% minus the MER of 0.25 = about 2.12. In some ways I suppose it makes more sense to use the Yahoo (etc. ) method .
 

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^Nope. That is the coupon yield. It will be reduced by capital loss as the bonds mature. Yield to maturity is the way to look at these bond funds.
 

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A compromise could be to own 50% in XSB and 50% in a GIC ladder. You can get about 2.6% with a GIC ladder of 1 to 5 years. XSB yields about 2.1%. Depending on your portfolio size and how much you allocate to bonds, the 0.5% difference may or may not be meaningful.
cc, if you blend those you get 2.35%, if you have say 100K, it hardly makes sense to risk capital loss in XSB and lock your money in GIC's for effectively $350 a year (since you can get 2% CDIC insured in a HISA at Ally for example .. plus I am seeing hints of other banks raising their HISA's as well) does it ?
 
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