Real Return Bonds

[Bylo Selhi]

Will they offer inflation-indexed bonds based on this new CPI?

Condoms, hair gel count for more on isle of love

NICOSIA (Reuters) - Condoms, hair gel and waxing are so much a part of Cypriot life that statisticians will from January count them among 150 new products and services used to calculate the monthly consumer price index. Authorities are revising the list to better reflect household spending patterns in the Mediterranean country nicknamed the island of Aphrodite for the Greek goddess of love and beauty. Quizzed about the inclusion of condoms, a statistics official told Reuters on Thursday: "It was one of those items which was always under-represented by households so we got the data from the importers."

The new costs include condoms, hair gel, waxing to remove unwanted hair and medication to treat erectile dysfunction along with zivania, a strong alcoholic beverage whose production was once banned, the newspaper Phileleftheros said.

[ghariton]

medication to treat erectile dysfunction

The locals pull too many trucks, I guess. (See Bylo's posting on some other thread.)

FWIW, the Canadian CPI probably omits the prices charged by prostitutes, unless of course it shows up as "miscellaneous entertainment".

"Honey, what did we spend on miscellaneous entertainment last month?"

"Gee, I don't know. Well, there was $200 to lease the truck, $20 bucks for the cable, and then $300 for that nice girl to massage all the kinks out of it afterwards."

Yeah, right.

Georges

[Donut]

I have never owned RR Bonds. Keeping track of CPI and accumulated interest and whatever is too much hassle for me. I am real interested inXRB, however, as buying, selling and tax returnes should be very simple. Hopefully, the returns will be equal to or better than I could achieve on my own.

[par4]

I have been holding RRb's for 4-5 years both in my RIF and personal accounts. They have been good for me, but at 76 years of age, perhaps it is time to unload. I can handle most of the gain but where to reinvest? Any Ideas?

[Bylo Selhi]

Any Ideas?

We need more information.

Why did you buy RRBs in the first place, i.e. what was their role supposed to be in your portfolio? Did they and do they continue to meet your needs? If not, why?

Have your circumstances changed, e.g. you need more cash flow to meet your minimum RRIF annual withdrawals, change in health? If so, how?

If you're concerned that prices have risen to unsustainable levels, then you could sell some or all of your RRBs, perhaps investing the proceeds in short-term bonds or a ST bond fund or an annuity.

[ghariton]

prices have risen to unsustainable levels....

Please define.

Georges

[Bylo Selhi]

prices have risen to unsustainable levels....

Please define.

I can't right now. Ask me again in 10 or 20 years

That why I wrote "If you're concerned that prices have risen to unsustainable levels..." Perhaps I should have worded it, "If you believe that prices have risen to unsustainable levels..."

[par4]

Thanks Bylo for the suggestions. Originally I bought them as a hedge against inflation, which I suppose could still be coming. I don't need more cash flow but I did wonder if they have risen to unsustainable levels. I am in the process of returning to cash as I have had a good run on energy, i.e.gas, oil, and uranium.

[Feeonly.ca]

I noticed that Real Rates have moved up ~5 bpts this week. Maybe this is why:

At noon today the Bank of Canada, on behalf of the government, will auction C$400 million of 3 percent real return bonds that mature in December 2036.

http://www.bloomberg.com/apps/news?pid= ... fer=canada

The article suggest we are still on track for several more rate increases by the Bank of Canada.

[bill2009]

At noon the Bank of Canada, on behalf of the government, will auction C$400 million of 3 percent real return bonds that mature in December 2036.

What does that mean though? The bonds will yield 3% and escalate by the cpi? Current aftermarket is 1.5% isn't it?

[dagan]

[Restored from backup 2006-07-18]

Current yields are in the 1.5% range, but the coupon may be 3%

[parvus]

Stumbled across this NBF analysis today; it's a month out of date but...

• Since the end of August, conditions have been favourable for
Real Return Bonds. For the first 10 months of the year, RRBs
generated a return of 10.79%, compared to 9.32% for traditional
long-term federal bonds.
• During the same period, U.S. real return bonds, (known as TIPS),
with maturities in excess of 10 years, generated a total return of
(in U.S. dollars) of just 1.92%.
• The question is whether the break-even inflation rate will remain
at 2.6%, or whether it will return to a band of between 2.2% and
2.4% in 2006.

Real return bonds: some observations

I've already posted this in the TIPs discussion — not that it's much of an issue for me, yet, since I don't have any bonds, and likely won't for another ten or fifteen years, since I don't need the income. Salary is my bond/cash component to dollar-cost-average/rebalance. I could either draw it from ~15k-20k in annual savings (the joys of being a car-less tenant ), or have a bond do it for me. Not much point in bonds @ 4%. But correct me if I'm wrong.

When I get fired I'll sing a different tune.

[Feeonly.ca]

I Bonds are looking good. Too bad we don't have a Cdn version.


NY Times Investing, Dec. 11, 2005

By JAMES PETHOKOUKIS

http://www.nytimes.com/2005/12/11/busin ... gewanted=1

Clips below from: The Bonds That Fight the Monster Called Inflation

.... On Nov. 1, the Treasury Department increased the variable I Bond rate to 5.70 percent - based on the climb in the inflation index from March to September - giving it a total annualized earnings rate of 6.73 percent.

....

"That jump really surprised everybody, even though we know inflation has been creeping into the number for at least a year," said Sue Stevens, director of financial planning for Morningstar and the owner of her own advisory firm. Ms. Stevens is a fan of I Bonds, which now provide a higher return than even 10-year Treasury notes. And the rate looks even better when you consider that many observers, including Ben S. Bernanke, who is expected to become the next chairman of the Federal Reserve, think that the C.P.I. overstates the real level of inflation in the economy. Holders of I Bonds will continue to receive that lofty rate of return until May, even if inflation cools.

....

TIPS and I Bonds rank up there with stock index funds as favorites of academics, reflecting a belief that trying to forecast the future is a fool's errand. Better to buy a big basket of stocks as a microcosm of the broad market, they say, than to try to select individual issues. And better to buy a bond that's built to beat inflation than trying to predict where prices will head.

"It's a bias that comes with knowledge and intelligence," said Zvi Bodie, a professor of finance at the Boston University School of Management and author of "Worry-Free Investing" (Financial Times Management, $24.95). "With TIPS and I Bonds," he said, "the federal government guarantees you will beat inflation, so that's a pretty reasonable choice."

[parvus]

yabbut Ellis:

Consider the performance of the Vanguard Inflation-Protected Securities fund. It had a total return of 7.6 percent in 2001, 16.6 percent in 2002, 8.0 percent in 2003 and 8.3 percent in 2004. Although the market has calmed down this year - the fund is up only 1.6 percent - Kenneth Volpert, its portfolio manager, warns that because the Fed's tightening cycle may be nearing its conclusion and energy prices are declining from their recent highs, "it feels like TIPS are not that great a place to be near term."

One downside to buying I Bonds today is that their return has become more volatile because the bulk of it comes from the variable rate instead of the fixed rate. I Bonds issued in the 1990's, by contrast, had fixed rates that were higher than their variable rates at the time. When the September 1998 I Bond was issued, the fixed rate was 3.40 percent and the variable rate was 1.24 percent; right now those bondholders are earning a whopping 9.20 percent. New buyers of I Bonds may need to keep their expectations in check. "When inflation does top out or decline and most of what you are getting will be that low fixed rate, these bondholders are going to have a little bit of a problem," said Allan Katz, a financial planner at Richmond Financial Associates on Staten Island.

[ghariton]

... "When inflation does top out or decline and most of what you are getting will be that low fixed rate, these bondholders are going to have a little bit of a problem," said Allan Katz, a financial planner at Richmond Financial Associates on Staten Island...

True enough. But I believe that the big surge in inflation is still in the not-too-distant future. If I'm right, holders of nominal bonds will look pretty silly. If I'm wrong, well, even if inflation drops to zero, I'll still be getting my 1.5%, instead of 4.5%.

Remember that the politicians' hands are on the printing presses (figuratively speaking).

Georges

[Feeonly.ca]

Zvi sent me this link yesterday. The UK version of the I Bond.

http://www.nsandi.com/products/ilsc/index.jsp

[northbeach]

As of Wednesday Dec 14

REAL RETURN BONDS
Canada 4.250 2021-Dec-01 137.49 1.58 -0.008
Canada 4.250 2026-Dec-01 146.71 1.61 -0.017
Canada 4.000 2031-Dec-01 150.62 1.61 -0.021
Canada 3.000 2036-Dec-01 133.26 1.63 -0.028

I currently hold some 2036 RRBs. The yield of 1.63% is virtually the same as for the 2021 bonds paying 1.58%.

Should I sell my 2036 and buy 2021?

I imagine I will lose out on the spreads.

[Shakespeare]

Should I sell my 2036 and buy 2021?

Why?

[northbeach]

I figure that the there is less risk in a bond that matures sooner.

I would get its full value if held to 2021. Not sure if I will last till 2036.

Do I understand how RRBs work in comparison to regular bonds?

[Shakespeare]

I figure that the there is less risk in a bond that matures sooner.

Not necessarily.

Thanks to commiescrooge on TWB for figuring out that the best RRB is the one that matches your life expectancy. If it matures too soon, you have cash which is not inflation protected. If it matures too late, you have uncertainty in the capital value. If you want to buy an annuity, the price of the bond will rise if real rates fall and fall if real rates rise, so it hedges your annuity purchase.

As you pointed out, switching will cost you the bid/ask spread. Unless you have good reason to think the 2036 bond has too long a maturity, why switch?

[northbeach]

If it matures too soon, you have cash which is not inflation protected.

If the bond matures in 2021, could I not buy another RRB at that time if I am still around.

(hopefully will thrive past 2030)

[Shakespeare]

If the bond matures in 2021, could I not buy another RRB at that time if I am still around.

Yes, but there could be a price difference that can work either in your favour or against you, depending on rates at the time. If you stick with the longer bond, those price differences are automatically hedged: the bond is worth more than face value if rates are lower and less if rates are higher.

[northbeach]

Appreciate your answer.

I will keep the 2036.

[Bylo Selhi]

TD's flogging this puppy. MER will be at least 1.1% plus 5% sales commission.

[jiHymas]

I figure that the there is less risk in a bond that matures sooner.

Not necessarily.

Thanks to commiescrooge on TWB for figuring out that the best RRB is the one that matches your life expectancy. If it matures too soon, you have cash which is not inflation protected. If it matures too late, you have uncertainty in the capital value. If you want to buy an annuity, the price of the bond will rise if real rates fall and fall if real rates rise, so it hedges your annuity purchase.

As you pointed out, switching will cost you the bid/ask spread. Unless you have good reason to think the 2036 bond has too long a maturity, why switch?

Isn't your usual position that there is less risk in a bond with a lower standard deviation of periodic returns?