Short Term Bonds in Canada

[no_free_lunch]

Would anyone have any insights into the performance of short-term canadian bonds.  If you look at a range of short term bond ETF's, xsb.to or clf.to their prices are both down from a decade ago.  Why is that happening?  It seems that yields for 1-5 year bonds are now lower than they were a decade ago so I would have expected the bond prices to be marginally up.

[Liberty]

Would anyone have any insights into the performance of short-term canadian bonds.  If you look at a range of short term bond ETF's, xsb.to or clf.to their prices are both down from a decade ago.  Why is that happening?  It seems that yields for 1-5 year bonds are now lower than they were a decade ago so I would have expected the bond prices to be marginally up.

 

Aren't bond ETFs going down because of the difference between the yield to maturity and the average coupon.

 

So for example, if the fund has some older bonds that yield 5%, they are bought at a premium so that the actual yield you get isn't 5% but rather the current yield in the space... So over time, you get that 5% coupon but the market price goes down so that in the end, your actual yield is closer to what a recent bond would do.

 

Sorry about the fuzzy terminology, bonds aren't my thing, and I could be wrong on this, but this is my understanding.

[John Hjorth]

It reads both correct and fully understandable, Liberty. [ : - ) ]

[odin]

big difference between the coupon and the yield to maturity or call

[Cigarbutt]

Would anyone have any insights into the performance of short-term canadian bonds.  If you look at a range of short term bond ETF's, xsb.to or clf.to their prices are both down from a decade ago.  Why is that happening?  It seems that yields for 1-5 year bonds are now lower than they were a decade ago so I would have expected the bond prices to be marginally up.

 

In terms of options, you may want to look at what your broker has on inventory (classified by duration with list of coupon, yield and approximate price).

 

In 2010-1 and in 2013 bought directly long term gvmnt CDN bonds and now looking at short term bonds. My understanding is that buying the bonds directly is relatively straightforward, is associated with lower "transactions" cost overall and allows you to minimize the tax inefficiency of buying a bond at a premium with a higher coupon. Also, by buying directly the bonds, you may be able to actively "manage" the capture of capital gains if/when interest rates move your way.

 

If you buy directly, there are some negatives:

-When buying and selling, you have to call to obtain a quote and the process may take 5 to 10 minutes.

-You may not be able to buy or sell on certain days (ie when the Bank of Canada makes significant announcements).

 

If you go that way (buying directly), you may want to be mindful of the ways to reduce the commission paid (which includes a spread).

 

The consensus seems to be that rates will rise and if you agree with that and if you plan to hold for a while, you may be better off with bond ETFs then.

 

[no_free_lunch]

I am too spread out to buy individual bonds and honestly etf's have such low mer's that I would rather go that route. 

 

I am probably just going to buy xfr.to, it's floating rate (1.3% ouch) but it doesn't change value as rates change.  Hopefully BOC hikes at some point here and the yield gets up to inflation, but in the meanwhile it's not worth reaching for yield.

[rb]

Why not go GICs. I'm sure you'll find some that have higher yields than Canadas. And if you don't have a lot of money to deploy there should be no worries.

[no_free_lunch]

GIC's are interesting, I hadn't thought of them.  The only issue there is the interest rates are sub 1% if you get redeemable versions.  You can get decent yields if you go out 18 months+ and non redeemable but I want the funds available if there is a crash.

[gokou3]

What about DRM.PR.A?  It pays almost 7% in tax-advantaged dividends (for Canadians) and is retractable at $7.16, close to the current market price of $7.27 (not sure how long that process takes though, if one is concerned about having immediate liquidity).  The company itself is engaged in the frothy Canadian real estate sector but seems to be doing rather well.  If things turn, and I doubt it would turn too abruptly, one can always sell or retract with trivial risk of principal loss.  This is the best close-to-riskless return I see in the Canadian market today.

 

https://web.tmxmoney.com/quote.php?qm_symbol=drm.pr.a

[no_free_lunch]

That does sound interesting goku.  I just wonder couldn't they not pay the preferred's if they get under stress?  Do they have to honor the retraction?  I will have to do some research on it but it is important that I not take a loss of principal as I'm not talking pocket change here.  However, it is also a very attractive yield so I definitely will be doing the work.

 

I have/had a medium size position in dundee  corp which I am massively underwater on.  I have to try to balance that as well.  They aren't 100% correlated but I would hate to get stung twice by dundee.

[no_free_lunch]

I did find this on the dream preferred's.

 

http://divestor.com/?p=6757

 

In other words, the market value of this preferred share issue is going to be anchored around the $7.16/share mark as investors are able to skim off a 7% eligible dividend until such time the corporation bites the bullet and finally redeems the shares. If it goes too below $7.16, it is an easy arbitrage to buy below $7.16 and instantly redeem if you believe there is any sense of credit risk. It is as close to a risk-free 7% as it gets.

[gokou3]

That does sound interesting goku.  I just wonder couldn't they not pay the preferred's if they get under stress?  Do they have to honor the retraction?  I will have to do some research on it but it is important that I not take a loss of principal as I'm not talking pocket change here.  However, it is also a very attractive yield so I definitely will be doing the work.

 

I have/had a medium size position in dundee  corp which I am massively underwater on.  I have to try to balance that as well.  They aren't 100% correlated but I would hate to get stung twice by dundee.

 

no_free_lunch,

 

The preferred is cumulative, so any missed dividends shall remain payable at a later date.  I would refer you to their May 31, 2013 prospectus on SEDAR (starting on PDF page 58) for all the details regarding the "Redemption at the Option of the Holder" (Section 4.03(g)) and other clauses.  AFAIK, the company can no longer convert the preferred shares into commons after June 30, 2016 (Section 4.03©), so some risks are eliminated there. 

 

IMO, there is no incentive / need for the company not meeting their preferred obligation.  The company has almost $2B of assets with over $900M of equity (as of FYE2017), whereas the par value of the preferred shares is only $29M.  Their net income for each of last 5 years exceed $29M.  I would be monitoring the company's liquidity and any signs of the Canadian RE collapse.

 

Although I think this is a very safe investment, I am NOT going into a all-in carry trade by taking a HELOC at 3% and investing into this for 7%.  In my mind this is a very good place to park my cash while waiting for better long-term opportunities.

 

P.S. I am also long Dundee, but only in the preferred at a cost close to the current market price.  I see Dundee preferred being a bit riskier due to it not being retractable.