Real Return Bonds

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Shakespeare
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Re: Real Return Bonds

Post by Shakespeare »

I've sold off two of the ETFs in my TFSA because I have doubts that they can perform up to the individual investor, who can take advantage of stock-specific opportunities like my opportunistic purchase of EMA the morning of the OctoberAugust correction.

I also don't like the Canadian MERs.

Edited to correct month.
Last edited by Shakespeare on 25 Sep 2011 23:42, edited 1 time in total.
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Re: Real Return Bonds

Post by schmuck »

Shakespeare wrote: I've sold off two of the ETFs in my TFSA because I have doubts that they can perform up to the individual investor, who can take advantage of stock-specific opportunities
No arguement there.
I own about 30 individual div stocks and no such ETFs.
The idea of div ETFs was intended specifically for soloman who has no equities at all, and a portion of his $50k bond proceeds might be a bit shy to achieve sufficient diversification with individual stock picks.
Nor would I argue that Div ETFs will outperform other sectors in the future, but I can't think of too many other sectors that will stand up as well as utilities, pipelines and telcos in down markets with record low int rates.
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Re: Real Return Bonds

Post by ghariton »

George$ wrote:Off topic.
George: It is not yet 4 AM. Are an early riser or a late sleeper? :)
Sorry, George$, I missed that. How about inveterate insomniac? I've developed tinnitus and while it won't kill me, it sure makes nights disagreeable.

Back on topic. According to the B of C, as of yesterday, long Canada nominal bonds were yielding 2.79% and RRBs were yielding 0.56%, for a spread of 2.23%. That's a bit more reasonable, given that inflation is currently running at 3.1%. Still, given that a reasonable premium for insurance against unexpected inflation is 0.5%, that suggests that expected inflation for the next ten years is 1.7%. I still think that's too low.

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Re: Real Return Bonds

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ghariton wrote:I still think that's too low.
But I need to know whether to listen to you or the market. I wish you'd tell me what you know that the market doesn't :wink:

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Re: Real Return Bonds

Post by ghariton »

newguy wrote:But I need to know whether to listen to you or the market. I wish you'd tell me what you know that the market doesn't :wink:
Oh, I respect the market. Notice that I'm not acting on my belief. In scomac's terms, I'm a "buy-and-forget" investor, except that it's not forgetting. In my case, it's not finding opportunities where I think I know more than the market. Every time I think I've found one, I go lie down, as I said before. Usually, I'm glad I did.

That said, reported inflation has come in slightly higher than expected by the consensus of economists in each of the last four or five months. I suspect that these guys are too locked into the Keynesian paradigm. I also notice, anecdotally, that the Canadian economy has shortages of many kinds of skilled labour and that the shortages are getting worse. I think that this is masked to some degree by the habit of reporting a single aggregate unemployment rate. As to capacity utilization, that is geared mostly to manufacturing, a sector that is less than 30% of our economy and shrinking. Finally, I think that we will be importing some inflation from China and other emerging economies, along with their exports. The foreign exchange rate will tilt, despite all that the Chinese government does.

As usual, this advice is worth every penny that you are paying for it.

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Shakespeare
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Re: Real Return Bonds

Post by Shakespeare »

The 2021 now shows on the G&M http://www.globeinvestor.com/servlet/Pa ... ype=fedgov at 142.97 and 0 real rate. My spreadsheet says -.04%. :shock:
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ghariton
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Re: Real Return Bonds

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Shakespeare wrote:The 2021 now shows on the G&M http://www.globeinvestor.com/servlet/Pa ... ype=fedgov at 142.97 and 0 real rate. My spreadsheet says -.04%. :shock:
Yes. Still falling. Bank of Canada -- the source I usually follow -- shows 0.52%, i.e. still positive. But that doesn't take into account spreads, etc.

We could see a longer period of negative real yields. (We've seen them for a while on nominal bonds up to 10 years.) The time to get alarmed is when the nominal yields turn negative, as they were reported to have done in New York earlier this year, for very large deposits.

Added: I know what to do. I'll invest in Greek government bonds. I understand that their nominal yield is north of 70%. :idea:

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Re: Real Return Bonds

Post by scomac »

Shakespeare wrote:The 2021 now shows on the G&M http://www.globeinvestor.com/servlet/Pa ... ype=fedgov at 142.97 and 0 real rate. My spreadsheet says -.04%. :shock:
The quote I have for my 2021's on my web broker statement is $142.099 this morning.
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Re: Real Return Bonds

Post by George$ »

ghariton wrote: ...
Yes. Still falling. Bank of Canada -- the source I usually follow -- shows 0.52%, i.e. still positive. But that doesn't take into account spreads, etc.
George
Question: Am I correct in understanduing that the 0.52% RRB in the above link is a 2041 due RRB?
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Re: Real Return Bonds

Post by Shakespeare »

I correct in understanduing that the 0.52% RRB in the above link is a 2041 due RRB?
It's a blended yield.
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Re: Real Return Bonds

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I correct in understanduing that the 0.52% RRB in the above link is a 2041 due RRB?
BoC wrote:The current benchmark bond issues and their effective dates, shown in brackets, are as follows.
.....
RRB - 2041.12.01, 2.00% (2010.10.21);
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Re: Real Return Bonds

Post by Shakespeare »

They changed the benchmark on me. :D
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Re: Real Return Bonds

Post by George$ »

newguy wrote:
I correct in understanduing that the 0.52% RRB in the above link is a 2041 due RRB?
BoC wrote:The current benchmark bond issues and their effective dates, shown in brackets, are as follows.
.....
RRB - 2041.12.01, 2.00% (2010.10.21);
newguy
Another question. Does all this mean that this 2041 RRB was issued in 2010.10.21 at an initial yield of 2.00% but today on the secondary market is yielding 0.52% ?
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Re: Real Return Bonds

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George$ wrote:Another question. Does all this mean that this 2041 RRB was issued in 2010.10.21 at an initial yield of 2.00% but today on the secondary market is yielding 0.52% ?
That was the date it became the benchmark. Here are the first auction results.

Auction Date Term Maturity Coupon Issue Amount Median Price Median Yield
2007.05.30 30Y 2041.12.01 2.000 650,000,000 100.249 1.990

So it initially yielded 1.99% in 2007.

http://www.bankofcanada.ca/wp-content/u ... esults.pdf

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Re: Real Return Bonds

Post by George$ »

Thanks newguy. Prior to your note I kept wondering (and guessing) what the reference to 2010 was about.

How times change! A decade ago, in 2000-01, the real return on RRBs was about 4.00% and today it is down to 0.52% - a huge reduction.

And given the 0.52% is the real return for 30 years (thirty years!!!) on this bond due in 2041 - it gives some measure of the uncertainty and fear about the future (for the next 30 years) investors sense in regards to the markets, earnings and the possibility of serious inflation. This is unsettling. :shock:
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Re: Real Return Bonds

Post by Tealeaf »

HI there,
Newguy, the dates shown in the referenced chart of various issue dates seems at odds with the fact that I bought 3% 2036s, the old BenchMark in August 2003. I got my piece at below Par as my Broker foisted it on me at the time, as they were not popular. Oddly, I thought it a good Buy as oppose to the other stuff he tried to sell me.
It is a pity that they changed the benchmark as it made it easier for me to follow.
For sure we are heading into record territory with very low yields being taken by those that are willing to accept 0.5% or less to a very long maturity in return for preservation of Capital.
Regular Cda Long Bonds yield 2.4%+ which I suspect may have a hard time matching Inflation.
Right now we have Negative Real Interest Rates with CPI at 3.2%.

George$, I agree that this sort of action bodes ill for the future. Great Concern for Inflation coupled with Desire to Preserve one's Capital. It would be interesting to know what the volume of Trading and percentage of the Bond Market, these types of Bonds represent. Certainly, it is never offered on my TD Board and the Dealers seem eager to buy.

If I have time tomorrow, I am going to set up a Real Yield Chart with Inflation Forecasting. Anyone done that type of Homework to share? At some point close to Zero Yield, it might be worth selling .
I reckon we will have actual CPI in the 3-4 range for next 4 years (while they try to sort out the current Debt mess) matched by Negative Real Interest Rates, followed by a period of lower Inflation (while they manage the Debt down a bit) which will then be taken out by Big Time Inflation, like you never saw before.

I give the whole thing 6-8 years tops. Any other thoughts as I get off the SoapBox?

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Re: Real Return Bonds

Post by ghariton »

Tealeaf wrote:It is a pity that they changed the benchmark as it made it easier for me to follow.
GlobeInvestor provides information on each issue.
For sure we are heading into record territory with very low yields being taken by those that are willing to accept 0.5% or less to a very long maturity in return for preservation of Capital.
Yes. This is a tricky time to be retired and in withdrawal mode.
Regular Cda Long Bonds yield 2.4%+ which I suspect may have a hard time matching Inflation.
Right now we have Negative Real Interest Rates with CPI at 3.2%.
Latest CPI is 2.9%. But that still results in negative real yields on all maturities of nominal federal government bonds.
George$, I agree that this sort of action bodes ill for the future.
There is a long list of reasons to worry. But then, there always is.
At some point close to Zero Yield, it might be worth selling .
We have had this discussion here (upthread, I believe) when real yields on RRBs were 2%, and again when they were 1%, and a few other times. One of the few things I have learned over the years is not to try to forecast interest rates, nominal or real.
I reckon we will have actual CPI in the 3-4 range for next 4 years (while they try to sort out the current Debt mess) matched by Negative Real Interest Rates
I think that this is a real risk.
followed by a period of lower Inflation (while they manage the Debt down a bit) which will then be taken out by Big Time Inflation, like you never saw before.
My crystal ball doesn't see that far.

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Re: Real Return Bonds

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Tealeaf wrote:HI there,
Newguy, the dates shown in the referenced chart of various issue dates seems at odds with the fact that I bought 3% 2036s, the old BenchMark in August 2003.
Here's a longer history of all the benchmarks.
http://www.bankofcanada.ca/stats/assets ... ch_CDN.pdf

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Re: Real Return Bonds

Post by Butler »

It sounds as if you guys think real return bonds are going to go south. This is a concern to me because RRBs have been one of the few bright spots in my portfolio. XRB DEX Real Return Bond ETF (+16.5%) and TD Real Return Bond Fund (+15%) have both made strong gains this year, and seem to still be going strong. I have a lot of money in these, and wonder what signs I ought to watch for in terms of reducing my exposure...
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Re: Real Return Bonds

Post by Tealeaf »

Butler,
I am not a fan of Funds or even latest cheapo fee'd ETFs.
I like to just buy the Bond itself.
Funds extract a Management fee every year and you are locked in as they have
to invest the maturities. At least with the Bond itself, you have a finite maturity
and get the Interest to play with or you can sell it when you want to. I say that without looking at the detail of yr holdings.
Etfs are just a flavor du jour as far as I am concerned, Not even sure who controls them
or backstops the relative value, always a worry esp. in this age of smoke and mirrors.
But again, no doubt I am ignorant.
I remember getting sold a Strip when I asked for a 3 yr Bond when they first came out.
Couldn't sell it for a decent buck and waited to maturity. BiBi that Broker.
Another time, Park my Cash in this nice Mortgage Fund, Safe, Steady Return, Good as Cash/Mmkt.
Rates went against me - lost principal, BiBi that Broker.

Ghariton,
Could you point me to which page(s) Discussion of Selling was made?
We have 47 pages and you have been a sturdy contributor; I am being a bit lazy
Thanks a Mill.
I wish
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Re: Real Return Bonds

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They are very rich, right now. I wouldn't be buying at these prices, but I don't see the point in selling, either. If you're happy with a guaranteed investment that just barely keeps up with inflation, then you may as well hold. Nominal bonds are unlikely to do as well, unless you think we're headed for deflation. Equities may do better, but they're certainly not guaranteed. I lump preferred shares into the same category as equities. Real-estate is a bubble that's waiting to burst as soon as rates start to rise. You can hold cash, but it's just losing value to inflation. Gold is a gamble and it doesn't pay interest.

So what's left to invest in?
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Re: Real Return Bonds

Post by Tealeaf »

Canopus,
Great Photo.
Wouldn't write Gold or PMs off.\\ Start with 5% now, good entry point.
SLW pays over 1% Div, G just hiked their rate.
Paid to hold.
This sector has made it for me over past 10 years.
Averaged close to 20% on my Holdings therein,
No Neg in 08, 15% and 20% p.a. Overall because of it, OK, marginally Down this year -1.5%.
But Hey, the Market is down more.
I am in that sector 35% and this year took Costs off the Table.
It is a Deflation/Inflation Play, good Insurance.

Anyway enough of that in this Sujet as I consider whether to hold or sell my RRs.
Agree too exp. to Buy.

Now to find the PM Forum
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Re: Real Return Bonds

Post by canopus »

Sure, gold stocks are a leveraged proxy for gold, but they haven't done anything this past year other than give you lots of volatility. RRBs have done amazingly well in 2011. Isn't gold used mainly as a hedge against inflation? That's what RRBs do, too, and give you a fixed price at redemption. More security that way, but you take on sovereign default risk as a downside. I think it unlikely that Canada or the US will default on debt. They'll just print money instead, which is good for RRBs. Europe is a whole other matter, but I wouldn't want to own any kind of European bonds.
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Re: Real Return Bonds

Post by ghariton »

canopus wrote:I think it unlikely that Canada or the US will default on debt.
Yup. Canada is a pretty good credit risk. If we get into financial trouble, we can always sell off Alberta. (It's the only part of the country that's worth anything.)

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Re: Real Return Bonds

Post by canopus »

ghariton wrote: Yup. Canada is a pretty good credit risk. If we get into financial trouble, we can always sell off Alberta. (It's the only part of the country that's worth anything.)
I wish sovereign bonds were backed with some kind of hard assets. Unfortunately, they're mostly just backed up by the politician-of-the-day's desire to make good on past government's promises. Way too many countries simply walk away from their debt, with only short-term pain.

IMO, government assets (land, buildings, roads, crown corporations, etc.) should go into the hands of bondholders when a country defaults. Of course, no current government would ever allow that, so sovereign bondholders have almost zero rights when it comes to bankruptcy.

I'm just betting that it's politically easier to print money than to default. Unless you're Greece, or Italy, or Argentina, or Brazil, etc.
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