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Email this2:14 pm
August 9, 2014
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Edit by admin: this thread was spun off from a discussion about preferred shares
Bill, have you consider purchasing Real Return Bond, or the US equivalent call Treasures Inflation Protection Security in your brokerage account (Ideally, in a register account).
They provide a perfect hedge against inflation for your capital and interest.
However, RRB do have low liquidity, and you also may need to purchase large amount at one scope while paying lots of commission as they probably have to be done through the trading desk.
Norman (Our very knowledgeable in-house expert), I do want to ask how is RRB taxed? Is the capital appreciation caused by inflation count as income, or is it count as capital gain ?
6:04 pm
September 11, 2013
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Thanks, Jon, I did once look at RRBs but they have some significant downsides too so I never bothered. I'm ok leaving some money in cash when interest rates are so low, and also using HISAs and a few 1-yr GICs for the rest of the liquid portion of my portfolio.
The capital appreciation every year must be included as income (as well as the interest payments received) even though you don't get it until maturity. The capital appreciation amounts reported as income are added to your ACB. Is my understanding.
8:34 pm
April 6, 2013
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My guess was the appreciation in the principal of a real return bond would be capital gains.
However, according to BMO Nesbitt Burns: Real Return Bonds, the appreciation is taxable annually as ordinary income. Looks like any inflation appreciation, for tax purposes, is deemed to be additional interest that's added to the principal of the real return bond.
BMO Nesbitt Burns warns that "During periods of very high inflation, there is a possibility that tax owing in a given year [because of the very high taxable increase in the Inflation Compensation on the principal] may be greater than the coupon interest received."
8:54 pm
April 6, 2013
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Just checked on Bank of Canada's Daily Digest. Long-term real return bonds currently have a yield-to-maturity of -0.23%.
One is literally paying 0.23% per annum for that real return which guarantees that one will trail inflation.
2:31 pm
August 9, 2014
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Norman1 said
Just checked on Bank of Canada's Daily Digest. Long-term real return bonds currently have a yield-to-maturity of -0.23%.One is literally paying 0.23% per annum for that real return which guarantees that one will trail inflation.
This may actually show that many people think like Bill and as a result, the demand for RRBs are very high.
I guess gold is the way to go than.....
I don't share the view of hyperinflation that Bill share, but half of my money is in precious metal at the moment. This is because all other assets are either crazy expensive, or they don't generate sufficient return in the case that inflation return with a roaring thunder because people either lost confidences in their money, or as a result of trade war between US and China, or as a result of geopolitical risk.
P.S: sorry for bragging a bit, but the return on my silver ETF (MNS) is north of 50% at the moment!!!
5:58 pm
October 21, 2013
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what about RRB funds? Would they function the same way? what happens when you sell?
I know it's not the mainstream view, but i do think significant inflation is coming, just a question of when and which sectors will be hardest hit at what time. Goings-on in the US are leading me to this conclusion.
12:30 pm
August 9, 2014
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Loonie, most bond fund don't have a fix maturity date, as a result, it is possible that you cannot get your principal back (unlike buying a bond and hold to maturity).
Your view, and Bill's view is much more common than you think. This view itself will cause inflation because the view will compel people to spend and invest more money quickly, which increase the velocity of money.
6:35 pm
August 9, 2014
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Jon said
Your view, and Bill's view is much more common than you think. This view itself will cause inflation because the view will compel people to spend and invest more money quickly, which increase the velocity of money.
I am not blaming anyone here, this is just a statement of fact in high school macroeconomics.
The problem with bond ETF not having a fix maturity and causing capital lost can be avoided with maturity date bond ETF/fund.
6:42 pm
October 21, 2013
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Thanks.
My view is not causing ME to spend more. The things that matter are mostly consumables like food and utilities, and you can't stockpile those to a significant degree. Also, I'm one of those annoying old people who don't spend much.
6:54 pm
August 9, 2014
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Loonie, inflation can be cause by different things. The conclusion that I draw assume it is a close model where an economy has no interaction with another economy, and it also does not consider politics, this is obviously not true. This implies it is very possible to have inflation cause by devaluation of currency, or by supply shock due to geopolitical risk.
9:06 pm
August 9, 2014
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I am pretty tone deaf here haven't I. I do apologize for that.
1:49 am
October 21, 2013
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I'm not following you now, Jon. Best we just leave it here, I think.
5:37 am
March 30, 2017
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RRBs has been out of fashion for years and will remain that way. If you look at the return, it has been dismal for the past 10-20 years.
As others point out, if one is concerned about hyper inflation, gold holdings are a much sure bet/hedge than RRBs
10:00 am
September 11, 2013
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Never mind hyper inflation, that's clearly not on the forseeable horizon, but significant inflation, as Loonie calls it, could come fairly quickly. Even a few years at 6% or so while your GIC is earning 2.5% pre-tax can seriously erode its purchasing power by maturity time, and I sometimes think young people who haven't experienced real inflation in their lifetimes need to be reminded that GICs are not risk free, in that sense. On the other hand, the memory of the stagflation/inflation of decades ago maybe has unduly influenced some of the older folks who were young then to think similar times might come back when we've had nothing but lower and lower rates since then.
11:58 am
October 21, 2013
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My own thoughts are based mostly on what is happening in the world right now. I do remember stagflation but don't think it's the same now.
Back in the '70s, I took a photo in a store in London Ontario which was selling envelopes in boxes. There were 3 versions of the box. Everything was identical except the price. Prices were going up so fast that there were 3 significantly different prices for the same item at the same time. I took a photo of the 3 of them as a kind of historical record that I found fascinating. Next time I see it, I may post it, but don't know where it is at the moment.
If there is inflation, do you think interest rates will rise in tandem?
7:17 pm
March 30, 2017
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Loonie said
If there is inflation, do you think interest rates will rise in tandem?
If inflation hits and stay above 2%, interest rates will rise in tandem.
Both the Fed and BoC are pretty clear on that. With the pandemic, central banks are more willing to wait a bit but will be ready to raise rates to combat inflation.
After all there are not that many tools they can use to "control" inflation.
Please write your comments in the forum.