If the smart money is right, the outlook may be better for bonds than stocks.
A question we should start asking ourselves about bonds: What's the point?
It's not the idea of diversifying portfolios with fixed income that's up for debate here. Rather, it's whether bonds are the right vehicle to use. For safety and higher yields, consider using a high-rate savings account instead.
Really, what you're doing in substituting a savings account for bonds is moving money into cash from fixed income. Cash, if you choose the right savings account, offers just as much of a hedge against stock market crashes as bonds, while also providing significantly higher yields.
We're talking here about high-rate accounts from online banks that offer premium rates to attract customers. The down side of using these accounts is that they can't be integrated into your investment portfolios. You have to set up an account directly with these banks and deal with them directly. The reward is a return as high as 1.8 per cent, which is well beyond what you'll get from quality bonds or bond ETFs.
Short-term bond ETFs have an after-fee yield to maturity of about 1 per cent these days. You can run that up a little bit with an ETF incorporating longer-term bonds – something like the iShares 1-10 Year Laddered Corporate Bond Index ETF (CBH), which has an after-fee YTM of 1.5 per cent.
Instead of individual bonds or bond ETFs, consider a high-interest account at an online bank like People's Trust, now paying 1.8 per cent on its e-savings account and 2.5 per cent on tax-free savings accounts, or Canadian Direct Financial, now paying 1.75 per cent on its TFSA savings account. Both Peoples Trust and Canadian Direct Financial are members of federally backed Canada Deposit Insurance Corp., which means deposits are protected for up to $100,000.
Alternatively, you could use an investment savings account that trades like a mutual fund and thus can be incorporated into your investment accounts. But returns from investing savings accounts have in many cases been affected by this year's decline in interest rates. Some still pay 1.25 per cent, but others have fallen to as little as 1 per cent.
Bonds and bond funds do have one thing going for them – the potential to make capital gains if interest rates fall. But if you consider bonds a long-term part of your portfolio, it's the ongoing income they produce and durability in stock market declines that matters more. On that count, a simple high-rate savings account can be a better choice.
Rob Carrick