The 5-Year Canada Government Bond yield started the week at 2.77% and ended at 3.02% (after touching as high as 3.14%).
Who cares?
Everyone who has a mortgage cares because it is the 5-year yield that directly determines mortgage interest rates. (That’s not surprising since historically, the most common mortgage term is 5 years).
Perhaps looking at interest rate movement in one week is too short a period to care about.
5-year rates crashed to .224% in April 2020, at the pandemic’s peak, and then began the long march higher to just under 4% in October 2022.
Since then, rates dropped, bounced back up, and declined again.
My base continues to be that we are heading into a recession (or are already in one), and in recessions, interest rates decline. There are fewer borrowers, so the competition for money is reduced, which drives down rates.
When interest rates decline, bond prices increase because they are inversely correlated. So, I hold bonds.
More specifically, I hold a basket of bond ETFs because buying low-cost ETFs is easier than buying the underlying bonds.
I currently own Canadian bond ETFs:
- CLG – IShares 1-10Y LADD GOVT BND
- XSB – IShares CORE CDN S/T BND ETF
- XGB – IShares CORE CDN GOVT BD ETF
- XLB – IShares CORE CDN L/T BD ETF
And TLT in my USD account.
I’ve attempted to “spread out along the yield curve,” so I have short, medium and long-duration bonds.
Should I concentrate on one end of the yield curve? Probably, but I’ve spread it out since I don’t know exactly what will happen.
I receive a dividend payment at the end of each month. Based on the closing price on March 31, 2023, and the dividend I received on March 31, here is the annual yield (assuming both the dividend and the ETF price don’t change for a year):
|
31-Mar |
|
|
Price |
Yield |
| iShares 1-10Yr Ldr GBd Idx ETF (XTSE:CLG) |
$ 16.96 |
2.5% |
| iSh Core Cdn ShTrm Bd Idx ETF (XTSE:XSB) |
$ 25.94 |
2.5% |
| iShares Cr Cdn Gov Bd Ix ETF (XTSE:XGB) |
$ 19.34 |
2.7% |
| Core Canadian LgTrm Bd Idx ETF (XTSE:XLB) |
$ 19.81 |
3.8% |
I bought these ETFs in January and given that interest rates are approximately the same now as in January, my cost basis on these ETFs is very close to their current market price. So, I’ve “parked” my money for almost three months and earned a yield.
My goal is to continue to “clip the coupons” until interest rates drop, at which point I sell the ETFs and realize a capital gain. The decline in interest rates will signal the start of the new bull market (not immediately) so having cash to deploy will be very important.
I believe we have one more big down-leg left in the general markets, so I expect to be in bonds until around the end of the summer, and then pivot to equities in the fall, or winter, or whenever the bottom appears to be in.
That’s the game plan. Let’s see how it plays out.
Interest Rates Up
by JDH on April 1, 2023
The 5-Year Canada Government Bond yield started the week at 2.77% and ended at 3.02% (after touching as high as 3.14%).
Who cares?
Everyone who has a mortgage cares because it is the 5-year yield that directly determines mortgage interest rates. (That’s not surprising since historically, the most common mortgage term is 5 years).
Perhaps looking at interest rate movement in one week is too short a period to care about.
5-year rates crashed to .224% in April 2020, at the pandemic’s peak, and then began the long march higher to just under 4% in October 2022.
Since then, rates dropped, bounced back up, and declined again.
My base continues to be that we are heading into a recession (or are already in one), and in recessions, interest rates decline. There are fewer borrowers, so the competition for money is reduced, which drives down rates.
When interest rates decline, bond prices increase because they are inversely correlated. So, I hold bonds.
More specifically, I hold a basket of bond ETFs because buying low-cost ETFs is easier than buying the underlying bonds.
I currently own Canadian bond ETFs:
And TLT in my USD account.
I’ve attempted to “spread out along the yield curve,” so I have short, medium and long-duration bonds.
Should I concentrate on one end of the yield curve? Probably, but I’ve spread it out since I don’t know exactly what will happen.
I receive a dividend payment at the end of each month. Based on the closing price on March 31, 2023, and the dividend I received on March 31, here is the annual yield (assuming both the dividend and the ETF price don’t change for a year):
I bought these ETFs in January and given that interest rates are approximately the same now as in January, my cost basis on these ETFs is very close to their current market price. So, I’ve “parked” my money for almost three months and earned a yield.
My goal is to continue to “clip the coupons” until interest rates drop, at which point I sell the ETFs and realize a capital gain. The decline in interest rates will signal the start of the new bull market (not immediately) so having cash to deploy will be very important.
I believe we have one more big down-leg left in the general markets, so I expect to be in bonds until around the end of the summer, and then pivot to equities in the fall, or winter, or whenever the bottom appears to be in.
That’s the game plan. Let’s see how it plays out.