Conservative investors, the best bond strategy for volatile times like these may be no bonds at all.
Substitute a five-year ladder of guaranteed investment certificates for your bonds or bond funds and you'll sidestep the kind of pounding bonds have taken in the past month or so. GICs are illiquid, but that's a good thing. They're not subject to the daily ups and downs of financial markets, so they won't scare you when you look at your investment account.
Short-term corporate bonds are a reasonable place to be if you want to hold actual bonds or bond ETFs, but the yields are thinner than you can get with GICs from alternative financial firms that are members of Canada Deposit Insurance Corp. The iShares 1-5 Year Laddered Corporate Bond Index ETF (CBO) has an after-fee yield to maturity of 1.4 per cent, which compares to a blended first-year yield of roughly 2.2 per cent from a five-year ladder of GICs offered by alternative financial firms like Canadian Direct Financial and Oaken Financial, both CDIC members.
Laddering bonds is a defensive strategy because you have money available every year to capitalize on higher yields. But CBO fell 0.4 per cent on a total return basis for the month of April, which shows it hasn't been immune to the bond selloff. Bond funds with longer durations – that's a measure of interest rate sensitivity – were down close to 1.5 per cent in April.
GICs do everything that bonds do in hedging against stock market and recession risk, but there are a couple of caveats. One has to do with the potential for the economy to stall. If that happens and interest rates fall, bond prices will rise while GICs remain inert. Also, you can't trade GICs unless you choose the lower-yielding, cashable version of these securities. The work around for the liquidity issue with GICs is to park some money cash. I looked at cash options for replacing bonds in this recent column.
GICs have faced a steady erosion of their image as interest rates have fallen over the past 20 years, and it doesn't help that some banks are posting one-year GIC rates today that are below 1 per cent. But if your bonds are making you afraid these days, GICs could be the answer.