Risking Less and Prospering using Real Return Bonds? [RRBs]

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor. Seeking advice on your portfolio?
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ghariton
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Re: Risking Less and Prospering using Real Return Bonds? [RRBs]

Post by ghariton » 23 Nov 2016 11:03

Flaccidsteele wrote:I would go further and say that bonds in general, are more complex than the investors who use them for "safety", realize.
Generally true for all investments. So what is the average person to do? Stick his money in a HISA? Or give it away to an investment adviser who doesn't properly understand these products either?

George
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Re: Risking Less and Prospering using Real Return Bonds? [RRBs]

Post by 8Toretirement » 23 Nov 2016 16:00

ghariton wrote:
Flaccidsteele wrote:I would go further and say that bonds in general, are more complex than the investors who use them for "safety", realize.
Generally true for all investments. So what is the average person to do? Stick his money in a HISA? Or give it away to an investment adviser who doesn't properly understand these products either?

George
We should approach investing with balance but scrutinize the products we use. Personally, I would not rely on an advisor for investment advice as I think their advice is biased, and a good majority are not motivated to properly understand the products they are selling since there compensation is not based on results. Many firms simply push in house products.

Just can't see the value added by many FA's.

I think we are discussing the finer points anyway. None of these points are even close to being a portfolio killer. As long as we don't make a major mistake such as speculating with a large portion of our portfolios I believe most individuals on this Forum will be fairly secure in whatever system they implement.

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Re: Risking Less and Prospering using Real Return Bonds? [RRBs]

Post by ghariton » 23 Nov 2016 17:41

8Toretirement wrote:Just can't see the value added by many FA's.

I think we are discussing the finer points anyway. None of these points are even close to being a portfolio killer. As long as we don't make a major mistake such as speculating with a large portion of our portfolios I believe most individuals on this Forum will be fairly secure in whatever system they implement.
Agree.

George
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Re: Risking Less and Prospering using Real Return Bonds? [RRBs]

Post by SoninlawofGus » 08 May 2017 12:16

The Globe site is the only one I am aware of still reporting RRB values. However, it reports a real yield of 0% up to 2031 (0.18% today). I strongly suspect the real return is below 0% (negative) for the shorter terms.

If one were to attempt to buy the 2031, the net real return after the market spread and purchase fee would probably be right about 0%.

It's the shorter terms real yields that I'm interested in understanding. Shakepeare has kindly provided this RRB ratio spreadsheet. From it, I suspect that I could calculate the real yield for the shorter term RRBs. But I don't know how to do that (or with confidence anyway). Could someone who has a better understanding of this spreadsheet provide the equation for this?

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Re: Risking Less and Prospering using Real Return Bonds? [RRBs]

Post by Shakespeare » 08 May 2017 13:15

The price on the globe site is equivalent to a non-RRB; that is, it is the today price divided by the index ratio. A bond calculator, using that price, a final price of 100, and the appropriate coupon will give you the yield. The index ratio is provided by the spreadsheet, but not the yield.

My 1-2-3 bond calculator gives, for the 2021 RRB today, with a price of 121.43 which I got by dividing the month-end pre-interest quote on my bond holdings by the index ratio, gives a yield of -.398%.


Added: Not all bond calculators handle negative yields. Yield to Maturity (YTM) Calculator | Investing Answers seems to.
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Re: Risking Less and Prospering using Real Return Bonds? [RRBs]

Post by SoninlawofGus » 08 May 2017 15:15

Shakespeare wrote:
08 May 2017 13:15
The price on the globe site is equivalent to a non-RRB; that is, it is the today price divided by the index ratio. A bond calculator, using that price, a final price of 100, and the appropriate coupon will give you the yield. The index ratio is provided by the spreadsheet, but not the yield.

My 1-2-3 bond calculator gives, for the 2021 RRB today, with a price of 121.43 which I got by dividing the month-end pre-interest quote on my bond holdings by the index ratio, gives a yield of -.398%.


Added: Not all bond calculators handle negative yields. Yield to Maturity (YTM) Calculator | Investing Answers seems to.
Thanks for that. Man, I wish I could say I fully understand the math, but I haven't worked it out yet. In any case, if the real yield is -.398% on the 2021, then that's interesting information. If someone were to build a ladder of RRBs for say the next 25 years, the yield on that ladder would be, I'm thinking, around -0.1% for the basket, though I don't have a good sense of what the spread would be on each RRB. Maybe another -0.1%?

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Re: Risking Less and Prospering using Real Return Bonds? [RRBs]

Post by ghariton » 08 May 2017 16:26

SoninlawofGus wrote:
08 May 2017 12:16
The Globe site is the only one I am aware of still reporting RRB values.
FWIW, TD Waterhouse is showing a price of $189.38 for the 2021 RRBs. That's the bid price. For the ask price, you have to build in the spread, typically around one and a half per cent.

Bank of Canada shows a positive yield of between 0.5 and 0.6 per cent for the long RRB (2044). That compares with a nominal yield of between 2.1 and 2.2 for the long run nominal (2048). That allows for anticipated inflation of 1.6 per cent over the time period, less an insurance premium of some 0.5 to 0.8 per cent for unanticipated inflation. So anticipated inflation is around 0.8 to 1.1 per cent. Seems low to me, making RRBs a bargain.

Finally, government bonds of less than 10 years maturity all have yields below the current rate of inflation. Negative interest rates galore.

George
Last edited by ghariton on 08 May 2017 22:47, edited 1 time in total.
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Re: Risking Less and Prospering using Real Return Bonds? [RRBs]

Post by Shakespeare » 08 May 2017 16:30

TD Waterhouse is showing a price of $189.38 for the 2021 RRBs.
Today's index ratio is 1.56174, giving 121.26 (189.38/1.56174) and a YTM of -.365%.
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Re: Risking Less and Prospering using Real Return Bonds? [RRBs]

Post by SoninlawofGus » 08 May 2017 19:06

ghariton wrote:
08 May 2017 16:26
FWIW, TD Waterhouse is showing a price of $189.38 for the 2021 RRBs. That's the bid price. For the ask price, you have to build in the spread, typically around one and a half per cent.
[Deleting previous bit asking about the price... you must own this and can see the price that way.]

It's only my speculation, but I feel that the markets plus a low Canadian dollar have given us Canadians a gift as I look to enter a semi-retirement phase. Consequently, and only because of the unexpected relatively rapid rise in our portfolio over the past year, I'm back to contemplating locking-in at least some gains through RRBs. Not long ago, I looked at RRBs as overvalued, and they probably still are relative to, say, GICs, but retirement scenarios have changed some of my planning strategies. It may sound strange to many that a 0% or even slightly negative return with an RRB ladder is "locking in" anything, but I suspect fixed income will provide negative returns in the coming years and equities will provide smaller gains, meaning even tracking 0% real with a balanced portfolio could become a challenge. I certainly hope not, but retirement is a different kettle of fish. Also, looking at the 1970s, for example, cash and bond rates can lag inflation for several years. Short GIC ladders could lag inflation dramatically for several years. Most importantly, I can leave things as they are and take my chances with market variances, or I can insure at least part of the portfolio. The plan would to use an RRB ladder with a short-term GICs in the intervening years. I'm not sure yet on valuation yet -- e.g., should the RRB rung be at the same amount initially, but that's partly limited by available funds anyway.

What I don't like is what I've always not liked about RRBs -- essentially mid- to long-bonds with an extra inflation component. I like the inflation component, hate the rest of it. I also don't like that they are premium bonds, with coupons paid out (TD never has strips), meaning the coupon should being rolled into a similar vehicle, but it really can't be. Anyway, gotta take the good with the bad, I suppose. I realize that the long bond component could mean these, on any given day, badly lag inflation. But I can't get around the diversification benefits. Maybe a year ago, I could ignore them, but I've come full circle

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Re: Risking Less and Prospering using Real Return Bonds? [RRBs]

Post by jay » 15 Sep 2017 10:48

I was searching for RRBs to see if anyone is getting interested with RRB real rates having lately risen to 0.77%.

Zvi advocates something like 90% safe (TIPs etc...) + 10% options. I ran a similar test with with 80% in TIPs and 20% in XIV, an inverse volatility ETN. I chose 20% in XIV because, from my own personal observation, XIV's return and volatility are roughly 5X that of the market.

Here are the results.

Image

Overall, it seems to track the market very well over the course of the last 7 years. That is a fairly long period with lots of ups and downs in both TIP and XIV. Note that I chose quarterly rebalancing given the high volatility of XIV.

I don't know how realistic/practical such a mix is, but it sure it is an interesting idea. I would've been personally happy with the results, i.e. achieving market-like returns yet with 80% in TIPs.

EDIT: included a better image

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