Bond yield trending higher | General comparisons | Discussion forum

kanaka said

While I continue to be confused with bonds......your link does not work.

Just think about yield curves and that provides the basics around bonds. Short term interest rates set by the Fed/Central Bank are not overly correlated to the bond market which makes up its own mind about what longer term interest rates should be. Generally speaking, the longer the term, the higher the yield (in a normal yield curve) but there have been several instances where the Central Bank has set high short term interest rates, but the bond market refuses to agree and one then gets an 'inverted' yield curve, i.e. higher short term than long term interest rates. That basically tells the Central Bank to 'stuff it'.

That said, some general thoughts are:

1. The Fed/Central Bank sets overnight, i.e. very short term, interest rates and CAN also influence longer term yields by buying (or selling) longer term bonds into the market, essentially upsetting normal commercial supply and demand. Flooding the market with liquidity puts downward pressure on bond interest rates.

2. The bond market, while influenced by Central Bank changes to interest rates, will ultimately set its own course. A case in point: Our BoC reduced short term interest rates back in January? and that cause bond yields of all sorts to fall (unexpected move by BoC). But as of last week, the bond market decided that was a bit of hocus pocus and has started a reverse trend to higher rates on its own. The 5 yr gov't of Canada bond has gone from circa 70 basis points to circa 100 basis points in a week or two (quite a move).

3. HISA and GIC rates are mostly influenced by the mortgage market whereby institutions will only pay enough to attract enough money to then lend out in mortgages. GIC rates CAN therefore become somewhat disconnected to the bond market in the 2-5 year duration range in particular. Indeed, GICs have been paying more than their equivalent bonds, though that is self-correcting some and GIC issuers may have to up the ante a bit on longer term GIC rates.

Brimleychen said

I have been waiting to roll some of retirement funds in long term corporate bonds. I will be able to get some A rated yield to maturity at 5.5% for 20 years. The yield was actually at 5% in late Jan.

Can these A rated yield to maturity 5.5% 20 yr bonds (be nice to get an example of one?) be easily transferred in-kind between bank discount brokerages like most stocks/etf's ?

For those not aware, it is a bad idea to hold strips in taxable accounts. Accrued interest each year has to be identified and taxes paid on it, even though one does not receive a cent from the bond until maturity. Same as a compound GIC.

It is also a bad idea to hold premium bonds in taxable accounts because one pays full marginal tax rate on the interest annually, while when the bond ultimately matures, there will be a capital loss at 50% tax rate. It can be a real headache trying to keep track of all this over a 20 year period.