It’s time to start thinking about applying the most basic rule of investing in stocks to bonds: Buy low.
Bond prices have plunged this year, which means yields have risen sharply. We are now getting into a zone on yields where investors with a long-term perspective may find some interesting developments, particularly in corporate bonds.
The yield on the FTSE Canada All Corporate Bond Index was around 4.8 per cent in late June. An exchange-traded fund holding corporate bonds should offer an after-fee yield of 4.3 to 4.6 per cent these days.
You’ll fall short of the 5 per cent yield you can now get in GICs with these ETFs, but there are some offsetting benefits. Bond ETFs have the liquidity of a stock, while GICs are locked in unless they’re cashable and thus have a lower interest rate. Bond ETFs also offer the potential for capital gains when interest rates decline.
Individual corporate bonds in the investment-grade category – generally, BBB and higher – can get you yields of 4 to 5 per cent for terms as short as two years.
Example: A BBB-rated Home Trust Co. bond maturing June 13, 2024, had a yield of 5.1 per cent in late June.
If you’re willing to hold out for four to five years, there are options like a BBB-high rated H&R REIT bond maturing June 2, 2026, offering a yield of 5 per cent.
For the past 20 years or so, a 5-per-cent yield from a bond or GIC has been the impossible dream for conservative investors. So what about locking in a yield of 5 per cent or better for the next 20 years or longer?
It’s possible, if you consider the likes of the Bell Canada bond maturing Dec. 18, 2045, and offering a yield of 5.6 per cent as of late June. A Metro Inc. bond maturing Dec. 4, 2047, offered a yield of 5.5 per cent.
The price of long-term bonds like these would likely get slammed if interest rates continue to rise, as is widely expected. One option is to keep an eye on these bonds and wait for still higher yields ahead. Then again, 5 per cent has proven to be a rarely available yield from an investment grade bond over the past couple of decades. If inflation exhausts itself in the next year or so, it may again be so.