A funny thing about the bond market is that we measure damage by noting how much yields are going up.
Rising yields means falling bond prices – that’s Bond Investing 101 stuff. But if you have new money to add to bonds, higher yields are a fantastic development.
Government of Canada bond yields have rocketed higher lately, but we’re still talking about a five-year yield of 2.3 per cent. Provincial bonds offer minimally more yield than that, while investment-grade corporate bonds do better still. In fact, there are corporate bonds with a credit rating of BBB or more that offered a yield in late March of 4 per cent or more for maturities of five or six years.
With inflation running at 5.7 per cent, no one’s going to set off fireworks to celebrate a 4 per cent bond yield. Yet this yield threshold does have some psychological value. It feels hefty and comparable to the yield on many much-loved dividend stocks.
A quick check with a big online brokerage uncovered these 4 per cent corporate bonds:
-First Capital Realty maturing May 6, 2026: Yield is 4 per cent.
-Allied Properties REIT bonds maturing May 15, 2028: Yield of 4.1 per cent
-TC Energy bonds maturing May 26, 2028: Yield is 3.98 per cent (these bonds are listed under TransCanada Pipelines, TC’s former name.
-SmartCentres REIT bonds maturing Dec. 18, 2028: Yield of 4.3 per cent
Prefer the instant diversification of a bond exchange-traded fund rather taking on the risk of holding one or two individual bonds? The iShares Core Canadian Corporate Bond Index ETF (XCB-T) offers an after-fee yield to maturity of 3.4 per cent. This ETF was down a substantial 6.7 per cent for the year through late March – that’s why the yield has been heading higher.
Expect bond yields to climb further – how much exactly depends to a large extent on whether inflation plateaus or keeps growing. This will be bad for bond prices, but good for yield-hungry investors with new money to add to their accounts.
-- Rob Carrick, personal finance columnist
This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.
Stocks to ponder
Magna International Inc. (MG-T) Shares of the auto-parts powerhouse bounced off their lows last week, suggesting that some brave investors believe that key players within the beaten-up auto parts sector are now too cheap to ignore. But David Berman warns that the ride could be bumpy: Bad news related to trade, geopolitics and economic activity have been weighing on companies like Magna for much of the past year – and the uncertainty is lingering.
Why does everyone keep buying stocks?
Loading up on stocks carries obvious risks when Russia is waging a barbaric war, oil prices are levitating north of US$100 a barrel and central banks are jacking up interest rates to crush runaway inflation. But bad news hasn’t prevented markets in both Canada and the United States from enjoying a nice rebound over the past two weeks. In fact, stock prices in both countries have recovered all their initial losses since Russia invaded Ukraine a month ago. What explains this strange loyalty to risky assets despite darkening economic prospects? Ian McGugan tells us about a few theories.
An investor’s guide to the regulatory crackdown on online brokers selling mutual funds
One of the more disreputable episodes in the history of online brokers in Canada is finally close to an end. Brokers got themselves hooked years ago on selling mutual funds that paid them fees they weren’t technically entitled to receive. Quitting these funds has proven to be quite the challenge for brokers, even though they were told 18 months ago to be fully out of this line of business by June 1. To keep the process on track, regulators announced a plan last week that should result in a clear win for investors holding funds at an online broker. Rob Carrick provides some need-to-know points.
Why this money manager is buying tech stocks again
As North American stock markets continue to rebound from their most recent slump, money manager Bruce Campbell is preparing for what he believes could be a new phase of growth. The Globe and Mail spoke to Mr. Campbell about what he’s been buying and selling and the investing advice he gives friends and family.
How to invest in the supercharged renewable energy sector
Renewable energy exchange-traded funds are hot right now, but they aren’t for the faint of heart as public sentiment and support can play as much a factor in their valuations as private sector fundamentals. Most are still down from the start of 2022 but have rebounded noticeably since the start of Ukraine conflict. Paul Brent reviews the recent action in these ETFs.
First-person investing tales
Others (for subscribers)
Are you a financial advisor? Register for Globe Advisor (www.globeadvisor.com) for free daily and weekly newsletters, in-depth industry coverage and analysis, and access to ProStation - a powerful tool to help you manage your clients’’ portfolios.
Ask Globe Investor
Question: Last week John Heinzl wrote about the Hamilton Enhanced Multi-Sector Covered-Call ETF (HDIV), which has a distribution yield of more than 8 per cent. How are the distributions taxed?
Answer: Exchange-traded funds publish the tax characteristics of their distributions each year, but you often have to hunt for the information. On the Hamilton ETFs website, go to the main page for HDIV, scroll down to “distributions” and then click on the link for 2021 tax information. You’ll see that HDIV reported total distributions of $0.65188 per unit in 2021, of which $0.10945 was classified as eligible dividends, $0.53168 was capital gains and $0.01075 was foreign income.
Keep in mind that HDIV has only been around since last July, and an ETF’s tax characteristics vary from year to year. Distributions from covered-call ETFs also typically include return of capital, which is not taxable immediately but reduces the adjusted cost base of the investor’s units. Remember, too, that the tax treatment of ETF distributions is only relevant if you hold your units in a non-registered account; in a registered account distributions are not subject to tax.
What’s up in the days ahead
Rob Carrick will be back this week with the next installment of the ETF Buyer’s Guide.
More Globe Investor coverage
For more Globe Investor stories, follow us on Twitter @globeinvestor
You may also be interested in our Market Update or Carrick on Money newsletters. Explore them on our newsletter signup page.
Compiled by Globe Investor Staff