Real Return Bonds

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ghariton
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Real Return Bonds

Post by ghariton » 06 Mar 2005 21:23

Hard to believe that this forum has gone three whole weeks with nobody posting on this topic (unless I missed it, in which case I apologize to the poster).

Over time I have had exchanges with some of you as to whether the CPI accurately measures inflation as it affects holders of RRBs, and more particularly, as it affects retirees.

A 1999 Statistics Canada study showed that, by and large, inflation rates were the same for the elderly as for the population as a whole.

Now there is a more detailed study by the New York Fed. It looks at how different groups experience inflation. As far as seniors (over 60) are concerned, the authors find that inflation experienced by seniors in the U.S. is higher than the average inflation rate by between 0.2% to 0.4% per year. This difference is principally due to the fact that health care is a more important element for seniors, and that the price of health care has been rising significantly faster than for other items. Health care has twice the weight in the elderly's household spending as for other Americans.

Using the data in the paper, I think that if one were to remove health care, the CPI for the elderly is significantly below the average CPI. That would be closer to the situation in Canada, where the bulk of health care expenditures are financed by taxes, and hence fall more heavily on the elements of population still in the "accumulation" stage.

In any event, I can't get really excited about a potential bias of up to 0.2% to 0.4% per year.

George

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Post by treetops » 09 Mar 2005 11:56

George, more on hedonic adjustment at the other site - see "CPI scam" in Wealth.

Gentlemen, start your engines...LOL

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Post by ghariton » 16 May 2005 13:44

Today's G & M shows the yield on the 2021 RRB to be 1.69%, and all maturities are under 2%.

What gives? Is 1% on the horizon? Or is 3% more likely?

More importantly, what do I do with the interest payments on June 1? The long-term plan is to keep buying RRBs, but at these yields? I'm getting cold feet.

George
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Post by Shakespeare » 16 May 2005 13:55

Is 1% on the horizon? Or is 3% more likely?
Your guess is as good as anybody else's. :wink:
keep buying RRBs, but at these yields?
I will put my interest in PH&N ST B&M.
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Post by Bylo Selhi » 16 May 2005 14:03

ghariton wrote:What gives? Is 1% on the horizon? Or is 3% more likely?
My crystal ball is cracked. Does it make sense to sell the suckers, take a nice capital gain and wait for prices to come down?
More importantly, what do I do with the interest payments on June 1? The long-term plan is to keep buying RRBs, but at these yields? I'm getting cold feet.
I've been stashing RRB interest in CIBC's ST bond fund (at 30bp MER) for the past year or so. Likewise with RRSP contributions. The ST bond position is now ~7% of the RRBs by market value.

To paraphrase Keynes, "RRB prices could stay irrational longer than we can stay patient."
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Post by marcharry » 16 May 2005 17:05

This is a topic near and dear to my heart, as I am sitting on a pile of cash that should rightfully be in RRBs.

Has anyone managed to summoned the courage to buy at these rates?

What do people think has to happen to increase RRB yields? I realize that they tend not to correlate with Corp/Govt bonds or Equities (this is one reason we love them) - but do you think regular bond yields have to rise to reduce price pressure on RRBs?

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Post by Feeonly.ca » 17 May 2005 02:23

My crystal ball is cracked. Does it make sense to sell the suckers, take a nice capital gain and wait for prices to come down?
Trust your tools people. Refer to your Investment Policy Statement to maintain the effectiveness of your financial plan.

The IPS is their specifically to guide you, especially at times when you are tempted to make a “value” judgment. The IPS is your essential touchstone for all of your investment management decisions.

Remember, the IPS documents your long term strategic allocation for each asset class. RRB's have their strategic weight, so does Cash, Short Term Bonds and Equities etc. The rebalancing overlay, which is also spelled out in the IPS should drive all portfolio adjustments. It’s a vital process, one that maintains the essential integrity of your investment plan.

Market timing with RRB's would likely just cause an unnecessary error. Following a well defined investment plan governed by a written IPS should have a higher probability of delivering successful results and minimize potential for regret.

The last error I made personally was "subjectively" deciding to sell additional RRBs when I was rebalancing. I should have stuck to the plan, it was clearly a mistake not to.

It takes dicipline and may people need help to do it, but the only way to win this game is to formulate a sound plan and then stick with it.

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Post by ghariton » 17 May 2005 09:08

Feeonly.ca wrote: Trust your tools people. ... Market timing with RRB's would likely just cause an unnecessary error.
You've talked me into it. :wink:

George
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Post by George L » 17 May 2005 10:35

I've been stashing RRB interest in CIBC's ST bond fund (at 30bp MER) for the past year or so.
Is that CIBC ST Bond Index Fund? According to Globefund it has a .96% MER.

It seems to me that XGV has a better performance than CIBC ST Bond.

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Post by Bylo Selhi » 17 May 2005 10:45

George L wrote:Is that CIBC ST Bond Index Fund? According to Globefund it has a .96% MER.
That's the one. But CIBC rebates the MER down to 30bp if you have at least $150k in CIBC index funds. (That's why I added the "(at 30bp MER)".) If you don't qualify for the rebate then yes, there are better alternatives.
It seems to me that XGV has a better performance than CIBC ST Bond.
The performance numbers for CIBC index funds don't reflect the MER rebate. How do the two compare when you add 60bp to CIBC's annual returns?
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Post by Norbert Schlenker » 17 May 2005 12:04

Feeonly.ca wrote:The last error I made personally was "subjectively" deciding to sell additional RRBs when I was rebalancing. I should have stuck to the plan, it was clearly a mistake not to.
And if real yields had climbed instead, would you still consider it an error?
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Post by George L » 17 May 2005 12:13

From this chart you get 5% more from XGV than CIBC ST in 3 years. That would mean more than 1.6% per year (let's forget about the effect of compound interest). But you have to take the XGV commission into account.

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Post by Shakespeare » 17 May 2005 12:16

From this chart you get 5% more from XGV than CIBC ST in 3 years
XGV has a longer duration than a short-term fund and will perform better during times of falling interest rates. If rates go back up, it will do worse.
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Post by DenisD » 17 May 2005 14:48

Globefund often gets XGV return wrong. GF says the 1yr NAV return is 2.95%. Iunits says 5.3%.

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Post by Shakespeare » 17 May 2005 15:11

GF says the 1yr NAV return is 2.95%. Iunits says 5.3%.
I suspect one is net of interest and the other is not.
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Post by ghariton » 17 May 2005 15:55

A recurrent topic connected to RRBs is whether seniors experience an inflation rate that is different from the average for the population as a whole. Here is a brand new research report from Statistics Canada that examines the question.

For Canada as a whole, the CPI tracked seniors' inflation very closely, e.g. from 1992 to 2004, seniors experienced inflation of 1.95% annually on average, while the CPI, reflecting the experience of all families combined, averaged 1.86% per year.

But of course there were differences, sometimes quite wide, for individual families. Curiously, there were also difference between seniors' inflation and CPI for individual provinces, although these averaged out on the national level as mentioned above. From 1992 to 2004, the cumulative inflation rate for seniors, averaged across all of Canada, was 26.1%. But in Quebec the corresponding number was only 21.2%, while in Alberta it was 32.0%. Of course, the all-family inflation rate varied by province too. The gap between the provincial all-family inflation rate and the provincial seniors-only inflation rate was widest for British Columbia and for New Bbrunswick.

From the study:
...differences in inflation between the provinces are much larger than the average difference between seniors-only and all other households at the national level.
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Post by Feeonly.ca » 18 May 2005 00:18

And if real yields had climbed instead, would you still consider it an error?
That’s one of the problems of acting outside of an investment plan. You’ll take credit for an outcome that goes your way, all the while building confidence where none is justified. However, when the subjective bets go bad they tend to get rationalized or ignored.

My advice is make an investment plan and follow it, especially when it seems difficult. Those are the times when strategy and discipline will most likely pay dividends.

When in doubt refer to the IPS, the decision making process is right there laid out in black and white. All you need to do is follow what you’ve already put in place for exactly that purpose.

The most important factor with in successful investing is not reducing cost, it is controlling you own behavior and error reduction.

30, 50 or even 100 bpts of saved cost is only relevant if you are not making a mess of fundamental investment management principles. I liken that to picking–up nickels while tossing dollars to the unpredictable wind.

Successful portfolio management incorporates a well defined and disciplined planning process. For it to work as designed it must be purposefully executed. Surely by now we can agree on that basic principle.

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Post by marcharry » 20 May 2005 14:39

Well now - its a fundamental yet profound POV. Amidst all that, ya really think I oughta get off the fence and buy 25% of my life's savings worth of RRBs?

I might have to hire fee only to push me off the cliff (for my own good), the spirit is willing - the fingers just won't make the call :)

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Post by Feeonly.ca » 20 May 2005 20:53

Well now - its a fundamental yet profound POV. Amidst all that, ya really think I oughta get off the fence and buy 25% of my life's savings worth of RRBs?
I think everyone otta have a plan, and an IPS. Guessing is no way to run a business or your financial affairs. I think everyone otta enjoy their life free of unnecessary worry. Having plan and a process should be a no brainer.

I really don’t know what would be appropriate for you, I haven’t the information to make that estimation.

I might have to hire fee only to push me off the cliff (for my own good), the spirit is willing - the fingers just won't make the call
I agree these would be very tough calls without a plan. On the other hand it's no big deal if you have your IPS. The decision process is starightforward, just execute as per the plan.

Without a plan and a map we are naturally caught in a state of uncertainty. Having a strategic plan makes it so much easier.

It becomes real investment management. Your actions become purposeful and deliberate because you are carrying out a plan instead of reacting to ole ... Mr. Market.

It takes forethought and dicipline, unfortunately very few people can actually do it without help.

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Post by like_to_retire » 21 May 2005 08:14

Without a plan and a map we are naturally caught in a state of uncertainty. Having a strategic plan makes it so much easier.
Agreed, but when following a road map, there are roadblocks that pop up now and then that require you to take an alternate path. Should we religiously follow an investment plan without questioning new, previously unavailable information?

If your major allocations are kept within their ranges, it seems smart to question sub allocations of the asset classes if they're in an extreme position. If the equity market is in an extreme position as in 2000, is it not smart to question your plan? If interest rates are at an historic 40 year low, is it not a good idea to maybe hedge your bets and keep your RRB interest payments in short term bonds?

I tend to follow my plan fairly close, but since I'm the one that came up with it, I don't blindly follow it without reassessment. :roll:

From Bylo's site, in reference to RRB's, I quote the statement, If you buy RRBs, make sure that the current real yield-to-maturity meets your needs and plan to hold them until maturity..

ltr

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Post by Feeonly.ca » 21 May 2005 11:17

I tend to follow my plan fairly close, but since I'm the one that came up with it, I don't blindly follow it without reassessment.
The plan should be reviewed and updated annually. The IPS and it's rebalancing overlay at the same time is checked to ensure all the important assumptions are still valid.

The annual review is a reasonable time to preform the calculations and rebalance back to the strategic weights set out in the plan. According to plan, selling some of the outperforming asset classes and adding to your underperforming asset classes automatically causes you to sell high and buy low.

The rebalancing procedure is vital, it brings integrity to the investment planning process. Without the diciplined follow-through we are right back in the "guessing" mode.

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Post by ghariton » 10 Jun 2005 10:11

Yield on the 2021 is down marginally to 1.64%, according to today's Globe and Mail.

Some economists are suggesting that bond yields are not going up anyn time soon. Indeed, there may be further declines, according to Stephen King, chief economist at HSBC and Stephen Roach at Morgan Stanley.

I'm not endorsing these views. I think that interest rates are impossible to forecast. So it's not clear to me whether. at current yields, RRBs are much too expensive, a bargain, or priced just right. (Gosh, that sounds like most commentators on the equity markets.)

George
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Post by treetops » 10 Jun 2005 15:49

Any comments on the new Connor, Clark RRB Income Fund? Via prospectus, minimum 80% RRB's, up to 20% non-TIPS foreign RRB's. Annual distribution targetted at 5% of NAV. Managed by a Legg Mason subsidiary. winds up in 2015.

http://www.cclcapitalmarkets.com/popup_June05.jsp

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Post by Bylo Selhi » 10 Jun 2005 16:08

treetops wrote:Any comments on the new Connor, Clark RRB Income Fund?
See this.
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Post by treetops » 10 Jun 2005 17:01

Thanks. Bylo. I'll use the search feature next time (dah!)

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