An RRB has a set value in inflation-adjusted terms (CPI-adjusted terms, if you prefer).8Toretirement wrote:With RRB's there is no set par value as with nominal bonds.
The holder will receive exactly the RRB par value adjusted to CPI. The par value is set in inflation-adjusted dollars.8Toretirement wrote: The holder could receive lesser amounts due to deflation.
If there is deflation, the par value will have preserved its buying power. If there is inflation, the par value will have preserved its buying power. That's exactly what I want from an RRB investment: exact CPI-adjusted future amounts.
A nominal bond is deceitful; it promises you a precise par value in future dollars. If I buy a nominal bond which promises me $1,000 in 30 years, I take a huge risk as I have no idea whatsoever what the purchase power $1,000 will be in 30 years, because the Bank of Canada's (BoC) current monetary policy is only set for the next 5 years. In 5 years or later, the BoC could change its inflation target or abandon it altogether. It's unlikely, I know, but it is not impossible.
What I am saying is that, between an RRB and a nominal bond, the more speculative investment is the nominal bond, not the RRB. I may not know the par value of the RRB in future dollars, but I actually know the par value of the RRB in current dollars, which is way more important!
The RRB will pay me back exactly its par value in CPI-adjusted terms on the day it matures. The purchase power of the principal will be preserved regardless of inflation, deflation, hyper-inflation, or hyper-deflation. That's exactly what I want from an RRB: preserving purchase power.8Toretirement wrote: The problem you get, especially with the secondary market when trying to match short term obligations within a portfolio, is RRB's are very volatile compared to short term bonds and the face value at maturity could be less than you paid.
Right.8Toretirement wrote:RRB's are not understood very well
Yep, exactly what I want. I don't care what the par value will represent in future dollars; I care about the purchase power of the par value as expressed in current dollars.8Toretirement wrote: "Determining the value when RRB matures: When an RRB matures, you'll get the face (par) value times the then current index ratio. In other words, you'll get the face value indexed for inflation. This will probably be more than the original face value, but if there's been a period of deflation, it could be less."
The RRB will deliver exactly its par value in inflation-adjusted terms at maturity; it will have preserved its purchase power.
That's a different issue. Now we're discussing a change of plans.8Toretirement wrote:An entirely separate issue: If you are forced to withdraw during a 13% loss in value, as has been achieved by RRB's in recent history you lose purchase power from an asset that is supposed to provide safety. I believe I read the worst year for nominal short bonds was 4%. Big difference.
If I keep bonds within a liability-matched non-rolling RRB ladder until maturity, I'll get exactly its expected payments in CPI-adjusted dollars (coupons and principals). If I sell any bond before maturity, I am exposed to interest rate risk; if an RRB is far from maturity, the potential loss (or gain) is bigger, if it's close to maturity, the potential loss (or gain) is smaller.
Historically, a total-market RRB ETF (such as XRB) has been less effective as ballast for short-term stock volatility than a nominal bond ETF (such as XBB). This is not surprising as the average duration of the RRB market is 16 years whereas the average duration of the nominal bond market is 8 years leading to significantly higher RRB volatility.
In the US, Vanguard offers a short-term TIPS ETF (VTIP) which has a low duration and, as a result, very little volatility. It would be difficult to build an equivalent RRB ETF in Canada because maturities are spread 5 years apart.
While less volatile than RRBs, nominal bonds carry a huge inflation risk. In contrast, RRBs have no inflation risk but are more volatile. But, let's be clear: RRBs remain much less volatile than stocks!
You're preaching to the choir.8Toretirement wrote:If the investor has not received OAS and CPP they might be better served by delaying these pensions that are inflation protected while also receiving higher payouts and associated additional inflation protection on the additional payout.
Here's a post I made in August: Delay OAS to 70, spend 8.8% more at 65!