Real Return Bonds

[jiHymas]

But the funds still appear to making good returns even although RRB yields have been in the basement for a while while bond prices have presumably plateaued.

Change in yield about 60bp x Duration of about 10 = 6%
+ yield about 5%
= about 11%

Numbers very approximate. XRB reports a duration of 16.24.

See DEX Index for a total return graph; up about 15% yoy, this is consistent with the XRB duration.

[Springbok]

If the ETFs, etc, are distributing the capital gains due to inflation

They have to, since they can't know whether or not the ETF is held in a taxable account.

How would they do that - If their RRB holding gained say 10% in value, would they sell off 10% of their holdings in order to make the distributions? If so, presumably the remaining smaller portfolio of bonds would produce less interest income?

Regarding taxable account or not. I don't understand why that would affect whether or not the etf or fund retained or paid out CGs. Could you explain?

[Shakespeare]

RRB return is due to two components absent valuation change: the coupon (which is taxable) and the CPI adjustment (which is taxable each year in a non-registered account). An ETF has to distribute the appreciation from the CPI change because the ETF may be in a taxable account. A mutual fund need not do so if it is only allowed in registered accounts, otherwise it too will distribute the CPI change. The amount of the CPI change can be reinvested or consolidated, but must count towards taxable distributions.

BGI shows the following distributions for XRB:

Code: Select all

x-Date1 *    Record Date    Payable Date    Distributions per Unit
Cash *    Reinvested2 *    Total *
24-Jun-2011    28-Jun-2011    30-Jun-2011    0.21320    0.00000    0.21320
24-Dec-2010    30-Dec-2010    31-Dec-2010    0.24326    0.42108    0.66434
25-Jun-2010    29-Jun-2010    30-Jun-2010    0.22801    0.00000    0.22801
24-Dec-2009    30-Dec-2009    31-Dec-2009    0.24656    0.01578    0.26234

(2) Reinvested distributions are not paid in cash but instead remain invested in the Fund. To recognize that these distributions have been allocated to investors for tax purposes, the amounts of these distributions should be added to the adjusted cost base of the units held.

which indicates that the CPI change (0.42108 in December 2010) is being reinvested (i.e. consolidated in the XRB price). Nonetheless, it will count as taxable income in a taxable account.


Added: the CPI change Nov 09-Nov 10 was 2% and the price $22, giving about $0.44 for the distribution. They may have used the average CPI change for the previous 12 months to get the actual value of about $0.42, which although slightly different would even out in the long run.

[Springbok]

RRB return is due to two components absent valuation change: the coupon (which is taxable) and the CPI adjustment (which is taxable each year in a non-registered account). An ETF has to distribute the appreciation from the CPI change because the ETF may be in a taxable account. A mutual fund need not do so if it is only allowed in registered accounts, otherwise it too will distribute the CPI change. The amount of the CPI change can be reinvested or consolidated, but must count towards taxable distributions.

BGI shows the following distributions for XRB:

Code: Select all

x-Date1 *    Record Date    Payable Date    Distributions per Unit
Cash *    Reinvested2 *    Total *
24-Jun-2011    28-Jun-2011    30-Jun-2011    0.21320    0.00000    0.21320
24-Dec-2010    30-Dec-2010    31-Dec-2010    0.24326    0.42108    0.66434
25-Jun-2010    29-Jun-2010    30-Jun-2010    0.22801    0.00000    0.22801
24-Dec-2009    30-Dec-2009    31-Dec-2009    0.24656    0.01578    0.26234

(2) Reinvested distributions are not paid in cash but instead remain invested in the Fund. To recognize that these distributions have been allocated to investors for tax purposes, the amounts of these distributions should be added to the adjusted cost base of the units held.

which indicates that the CPI change (0.42108 in December 2010) is being reinvested (i.e. consolidated in the XRB price). Nonetheless, it will count as taxable income in a taxable account.


Added: the CPI change Nov 09-Nov 10 was 2% and the price $22, giving about $0.44 for the distribution. They may have used the average CPI change for the previous 12 months to get the actual value of about $0.42, which although slightly different would even out in the long run.

OK thanks a lot - That helps!
- Now I have a slightly better understanding of these RRB funds, it seems this is probably not a good time to buy them. Friends were telling me about the great returns they were getting on RRB funds and that puzzled me. But I guess they were a good buy if you bought in a few years back.

[ghariton]

it seems this is probably not a good time to buy them. Friends were telling me about the great returns they were getting on RRB funds and that puzzled me. But I guess they were a good buy if you bought in a few years back.

Yup. Two or three times a year I get an irresistible urge to sell mine and buy them back when, inevitably, yields will have increased to 2% or so. Whenever this happens, I go lie down until the urge passes.

Nobody said that buy-and-hold is easy. In fact, I find it to be the hardest investment style to implement -- and I've tried quite a few.

George

[ghariton]

Bank of Canada reports that average yield yesterday August 2 was 0.72%; comparable nominal yield was 3.16% for a spread of 2.44%.

If one were to guess an unexpected inflation premium of 50 to 80 basis points, that implies an expected inflation forecast of 1.6% to 1.9% -- as an average for the next twenty years or so.

In passing, perhaps I should open a book on whether the real yield will go negative.

George

[adrian2]

In passing, perhaps I should open a book on whether the real yield will go negative.

I'll bet on the "yes' answer.

[big easy]

In passing, perhaps I should open a book on whether the real yield will go negative.

I'll bet on the "yes' answer.

Why?

[ghariton]

Why?

Negative real yields help debtors at the expense of creditors. Who is the biggest debtor these days?

George

[adrian2]

Why?

For nominal interest rates, there's a natural floor at zero; for real rates, there isn't.

[IdOp]

For nominal interest rates, there's a natural floor at zero; ...

I would think so too, but aparantly that floor is starting to show cracks, according to fhis article:

The flight to safety was exacerbated by a move by Bank of New York to begin charging an additional fee for cash deposits, which pushed more cash into the short-term funding markets, according to traders. An auction of 10-day bills by the US Treasury drew yields of zero per cent, and one-month Treasury bills dropped to negative yields, of -0.0102 per cent, their lowest since January 2010.

(my bolds)

IOW, people have started agreeing to get back less than they put in, guaranteed! Time to buy extra mattresses? Or a predictor of deflation? Strange times indeed.

[Shakespeare]

IOW, people have started agreeing to get back less than they put in, guaranteed! Time to buy extra mattresses? Or a predictor of deflation?

More likely time to be adding equities....

[marcharry]

I have some RRBs to sell. I can chunk them together and sell them in at least $50,000 orders. Can someone explain in very practical terms how to sell them (and minimize commision).

I have never sold a bond before. I have bought them and held them to maturity. So, I mean explain as in "1. Call the bond desk". My broker is TD Waterhouse.

I understand that I am going to get market price-commision + accrued interest to the date - its just that the commision is not transparent is it?

[Bylo Selhi]

So, I mean explain as in "1. Call the bond desk". My broker is TD Waterhouse.

I understand that I am going to get market price-commision + accrued interest to the date - its just that the commision is not transparent is it?

The main problem is that you're stuck with whatever commission your broker decides to charge. You generally can't bargain and you can't move the bond to another broker quickly enough even if they offered a higher price. Worse, based on my the days when I held the same RRBs at both TDW and RBCDI, the market values they report on the same day always differ. Sometimes the difference are small; often they're significant. Sometimes it's better to use TDW and other times RBCDI. So basically you're at your broker's mercy.

If you want some sense as to how much commission you're paying look at the market value reported in your account and compare it to what you get using How do I buy an RRB?. In this case you're selling but the arithmetic is essentially the same.

[ghariton]

I thought that there isn't any commission on bonds. The dealer's profit is all in the bid-ask spread, and the dealer decides that.

But then I've never sold a bond either.

George

[jiHymas]

I thought that there isn't any commission on bonds. The dealer's profit is all in the bid-ask spread, and the dealer decides that.

But then I've never sold a bond either.

George

That's actually quite an important point.

When you are trading bonds - either buying or selling - with your dealer, he is acting as a principal, not as an agent. He wants you to be left homeless, naked and hungry. That's his job.

[Shine]

What regulation is in place to protect the retail purchaser of bonds, whether RRBs, strips, or corporates, from manipulation and excessive fees?

[Bylo Selhi]

I thought that there isn't any commission on bonds. The dealer's profit is all in the bid-ask spread, and the dealer decides that.

Poor choice of terminology. The "commission" comes from the spread. Since you're stuck with a dealer who's acting in their own self-interest you pay a hefty price (call it what you will — spread, commission, hair-cut, rape...) every time.

[scomac]

The "commission" comes from the spread. Since you're stuck with a dealer who's acting in their own self-interest you pay a hefty price (call it what you will — spread, commission, hair-cut, rape...) every time.

That's why it is best to buy bonds when the seller is motivated. This usually happens when the investment banking arms of the big 6 underwrite a new debt offering and charge their respective brokerages to move it to the patsies masses. I've seen this on several occasions, especially when they create a strip out of new offering. The YTM can be as much as 50-100 basis points higher than a comparable term and credit quality issue in the secondary market.

[jiHymas]

What regulation is in place to protect the retail purchaser of bonds, whether RRBs, strips, or corporates, from manipulation and excessive fees?

There just has to be some regulation, doesn't there? A packet of nonsense has been proposed in IIROC Notice 10-0163, but I'm not sure of its current status.

[Shakespeare]

What regulation is in place to protect the retail purchaser of bonds

On thinly-traded stuff like RRBs, you might ask the bond trader to wear a condom before he screws you.

[Bylo Selhi]

The 2021s are down to 45bp real (And the 12/12 coupons are down to 15bp real.)

[ghariton]

The 2021s are down to 45bp real

Compare to a nominal gov't bond maturing in June 2021, yielding 2.41%. An investor in the nominal bond is betting that inflation for the next ten years will average below 2%.

I would not make such a bet. In fact, scanning the various nominal yields available on Globe Investor, I don't see why anyone is purchasing any of them at this point.

YMMV

George

[Shakespeare]

An investor in the nominal bond is betting that inflation for the next ten years will average below 2%. I would not make such a bet.

Neither would I.

[like_to_retire]

In fact, scanning the various nominal yields available on Globe Investor, I don't see why anyone is purchasing any of them at this point.

I don't think it's a bad bet buying a 5 year GIC at 2.85%.

ltr