Ok this is starting to get silly. For more than 3 years now I’ve been told by almost every article I’ve read, radiohead I’ve heard, and TV pundit I’ve watched that I should sell my bonds. Why? Because once interest rates start to climb, the saleable value of the bonds will have to drop so that the yield will increase so that buyers will be willing to purchase them. (Conversely, when interest rates dropped, the yield went up so sellers demanded a higher value for their bonds which reduced the yield but kept it higher than that offered by other fixed income investments like GICs.) Last year, I seriously thought about dumping my holdings in bond funds because it seemed like interest rates were finally going up; I’m glad I didn’t, totally.
What Did I Do with My Bond Investments in 2014?
In 2013, my bond funds lost a bit of ground. So in 2014, I tried to decide when and how to dump them. I began to second-guess myself though when interest rate announcements seemed to say things were staying flat.
Eventually, I decided to liquidate all the earnings made by the bonds in the past three years. In other words, I sold off enough units to drop the total invested amount back to where it was on January 1 2011.
What Happened with the Amount I Left Invested in Bond Funds in 2014?
Strangely enough, my bond funds did very well (for fixed income investments) in 2014!
They increased in value about 7.6% after costs.
(That’s understated because it assumes the gain was earned by the entire amount I started 2014 with in bonds, when in reality for most of the year less than that amount was invested in bonds. I didn’t include any of the profit earned by the money taken out of the bonds and invested elsewhere.)
That’s quite a bit over the 1-year GIC rate of about 2%!
Since I keep a certain asset allocation which is heavy on fixed-income investments, I’m glad I kept that money in bonds. The part of it earning GIC-rates sure didn’t grow much in 2014.
What’s My Plan for the Bond Funds for 2015?
I’ve decided to leave them alone. They will probably drop a bit in value if interest rates rise. The effect of ending quantitative easing, however, appears to be over with already. Or if it isn’t, it’s really not going to be a predictable effect.
In the meantime, PH&N appears to have some sort of idea of how to game the system. There’s not really any reasonable explanation for a 7%+ yield on a bond fund. They must be doing a fair amount of trading and winning capital gains to push it that high in such a low yield environment.
They do mention that they have bought in to some relatively high yield provincial (Canadian) bonds and that they are picking and choosing some corporate bonds to hold to maturity. (Note: this particular fund does not invest in high-yield aka “junk” bonds.)
So I don’t expect to get another 7% in 2015. I expect to see somewhere between -3% to +5%.
But, hey, since the articles, radioheads and pundits have all been wrong, I won’t be surprised if I am too!
Related Reading
- Why Defined Contribution Pension Plans are a Pain
- I Doubt I Will Ever Fully Understand Fixed Income Investing
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Whither go bonds in 2015? Up, down, sideways? If you’re invested, will you stay the course? Please add your opinion with a comment: you may very well be better at predicting the fixed income market than the talking heads on the TV!
PH&N Bond must have longer bonds. Otherwise, I don’t get the returns :)
They have all kinds of tricks. They have some provincial bonds with yields in the 6-7% range. They have some 30, 40 and 50 year bonds. But they also actively trade bonds and when they are holding such huge volumes they can make tidy capital gains if they time the market correctly. Frankly I don’t think I’d want to look too closely at how it all works: the fixed income market is huge and it’s largely opaque because it’s mostly institutional buying and selling and the retail component is so tiny it’s looked at scornfully by most brokerages and investing companies. For sure they don’t pay what we would if we tried to get some of these issues directly. (Which we can’t even do as they never are floated to the retail desks.)
I just wish our DC pension had some other choices for fixed income. A mid-to-long term bond fund is not my idea of a safe haven for my capital with an impending interest rate spike and a predicted long slow climb in interest rates.
PS sorry for the slow post: I had to rescue this from the spam trap again.
This good return is not specific to PH&N. Bond Index funds had similar returns in 2014.
TD Canadian Bond Index – e (TDB909) returned 8.28% and
Vanguard Canadian Aggregate Bond ETF (VAB) returned 8.59% (NAV).
True and this in a year when everyone said they would tank. I don’t think I’d like to predict the bond fund returns!