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  • Dec 5th, 2019 7:23 pm
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[OP]
Sr. Member
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Jul 16, 2019
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Bonds vs. HISAs

I'm skeptical about the value of bonds in investment portfolios. I'm not saying you should go all in on equities. I'm just struggling to see the advantages of bonds over high interest savings accounts.

LBC Digital/B2B Bank are giving 3.3% interest on their HISA. Rosenort gives 2.85% on their TFSA.

Do bonds beat these rates?

If they don't, why shouldn't I keep more of my funds liquid by eschewing bonds in favour of HISAs?
14 replies
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Jan 4, 2009
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on the links
Bonds are a better choice when interest rates are falling. In our current environment there's little wiggle room for that to occur and even if it does happen, the small rate drops won't have a huge impact on bond prices. I haven't purchased a bond in many years, IMO it's just not worth the risk/reward.

I lived through the investment years of the early 1980s, when interest rates were in the high teens. I remember buying Canada Savings Bonds (not really a bond, more of a quasi-GIC) @ 19.5%. That was a great period to invest in bonds, since most sane people realized that rates would eventually have to drop.
Jr. Member
Dec 1, 2019
129 posts
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With this period of low interest rates, bonds (and bond ETFs) will have lower returns than HISAs and GICs.

If it's just your regular HISA vs. bonds, bonds can be put in an RRSP/TFSA, while the interest on a HISA is taxed at your full marginal rate.

If it's a TFSA HISA vs. a bond sitting in your RRSP/TFSA, the TFSA HISA wins out.

The other hit to bonds is that with this period of low interest rates, most bonds are premium bonds.
If you hold premium bonds in a taxable account, not only do you pay tax on the coupons, but you lose money at the end because you bought the bond for more than it's face value. And although it's a harvestable loss, you can't use it to reduce tax on interest income, only for capital gains elsewhere.

https://canadiancouchpotato.com/2013/03 ... -accounts/

CPM has done the math and you can do a mix of bonds and GICs to have enough liquidity for rebalancing.

https://www.canadianportfoliomanagerblo ... s-or-gics/

I looked at this recently too and realized that I'm better off right now with a TFSA HISA. Both XBB and ZAG have YTMs of 2.14%, lower than TFSA and non-TFSA HISA interest rates right now.

https://i.imgur.com/TuAzR0x.png
https://i.imgur.com/InZGVuW.png

https://forums.redflagdeals.com/officia ... 06-681290/
https://forums.redflagdeals.com/officia ... 06-698055/
Deal Addict
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Feb 1, 2012
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If you buy a bond and hold it to maturity, you know exactly what your return will be (unless the issuer defaults which is rare with investment grade bonds). With a HISA you don't know and the rate could decrease (or increase).

YTM on a bond ETF is the expected yield at today's interest rates. If rates go up, then yield will go up as existing bonds mature or are sold and get replaced with newer higher yielding bonds. YTM on ZAG, XBB and VAB are currently low because of the inverted yield curve, and that will change when the yield curve normalizes.

With a HISA you are limited by the CDIC limits at any one financial institution. With bonds or bond ETFs, you can buy much larger amounts of investment grade bonds at one broker with a very high certainty of return of principal.

I think there is distortion in interest rates caused by newer online banks chasing new deposits with high promo rates. And those deposits are used to fund higher rate mortgages by smaller banks like Equitable, Home Equity, B2B etc. Technology and ecommerce have enabled newer banks to operate online without branches. I think such relatively high HISA rates will be a somewhat temporary phenomenon as online banks jockey and compete for deposits. At some point the market will stabilize, and savings deposit rates will normalize.

Enjoy the great rates while you can!
I solemnly swear, to never assume I have an inkling at which direction the market will head, and to never make any investments based on a timing strategy.
Sr. Member
Oct 14, 2012
676 posts
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Woodstock
Sometimes you want to have some fixed income within a defined contribution pension plan, even if you are optimizing your investments across all types of accounts. If so, it's very unusual to have access to a HISA or GIC choice within the pension etc acct, especially not one with a good rate. A bond fund may be the better choice there, depending on the other options.

Our PH&N Bond fund within one of our defined contribution plans has earned 7% so far ytd. It is an "actively managed" bond fund, so they are trading bonds to make a profit as well as investing money for bonds with various terms. From time to time, we have sold of this bond fund fixed income to add more to our global ETF occasionally when it pulled back.

Outside of those types of limited-choice accounts, we have not used a bond fund in the past ten years.
Sr. Member
Jul 1, 2006
691 posts
473 upvotes
I've been struggling with bonds as well. Here's some timely food for thought:

https://milliondollarjourney.com/fixed- ... counts.htm
https://www.canadianportfoliomanagerblo ... adventure/

The key takeaway for me from the second article is:
When the YTM of a GIC ladder is similar to or higher than the YTM of a bond ETF, it can be a decent alternative for a short-term or a broad-market bond ETF.
(I'd substitute HISA for GIC ladder in this case, since 2.8% from Motive and 3.3% from the Laurentian twins are considerably better than what you can get from a GIC ladder.
Deal Addict
Sep 6, 2010
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Neither of these rates is available for a non taxable account.
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Sep 6, 2010
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XBB and ZAG up 4-5% YTD
[OP]
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Jul 16, 2019
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gwplant wrote: XBB and ZAG up 4-5% YTD
I'm not concerned about a single year. The question is whether they they beat HISAs over the long run.
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Sep 6, 2010
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XBB up 12% since 2006 NOT including 13 yrs of dividends.
[OP]
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Jul 16, 2019
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gwplant wrote: XBB up 12% since 2006 NOT including 13 yrs of dividends.
12% over 13 years sounds like a tiny return.
Deal Addict
Sep 6, 2010
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Vancouver
It would be if you didn't include the dividend, like icing on the cake as well as access to capital within a TFSA for buying opportunities elsewhere. Bonds are a hedge to let you sleep well at night, having gone through 3 major corrections and getting liquidated foolishly during the dot com wreck I am ok with a "tiny return" to be able to sleep at night and still retire in the next 10 years or so.
Jr. Member
Dec 1, 2019
129 posts
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Using portfoliovisualizer we can see what reinvesting the dividends does.

Image

58% inflation-adjusted return over 17 years, 3.4% per year on average. However, bonds during this period have been doing well - the BoC policy interest rate hasn't been at 4% since before the 2008 recession.
Here is the important chart from the CPM article that sckor linked:

Image

As for HISAs, a 3.3% interest rate before tax translates to a 2.32% after tax interest rate assuming your marginal tax rate is 29.65%. It's not hard to find a TFSA HISA rate better than that.

As Deepwater said earlier though, these HISA and TFSA rates are probably not going to be this high in the long term.
With that kind of risk, the standard way to reduce it would be to diversify across fixed income sources.
Deal Addict
Oct 4, 2009
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Montreal
someweirdo wrote: I'm not concerned about a single year. The question is whether they they beat HISAs over the long run.
Although I agree with your OP and many of the posts in this thread, be careful extrapolating current conditions longterm. HISAs beating mid term bonds is not normal and unlikely to be sustainable. Then again some of us have been using HISAs or short term GICs in place of bonds for close to a decade and never thought it would last this long. At some point broad bond ETFs should have higher YTMs than HISAs and GICs as compensation for term risk. In the long run it’s unnatural and even unhealthy for an insured short term product to offer better returns than a riskier longer term product.

Until things normalize, keep on.
Newbie
Oct 31, 2015
85 posts
36 upvotes
Nanaimo
Been using a couple of HISA now for the last 3 or 4 years for savings/emergency funds. Will reconsider GIC's when they become more favourable but 2.3% with an occasional 3-3.3% 90 day GIC offering is a no brainer for me. In registered accounts I have some bond funds but have reduced them as they have been my biggest losers.

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