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Short term bonds? Interest rates?

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asked Jun 30, 2017 02:04 PM by
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Hi,

I'm currently invested in VSB.TO (https://www.vanguardcanada.ca/institu...), which is the cheapest bond fund I found (0.11% MER). It has a duration of 2.8 years.

Given that there's some aggrement that interest rates will rise in July, would it make sense to go to cash for a month? Or switch to floating rate? Are there any IG floating rate or floating trate Canadian Government bond ETFs?

Would there be any issues with HAB.TO? It's Horizons Corporate Bond, but I think it invests in both Canada and US (88% Canada, 10% US, and 1% UK), and it has a duration of 6.28, so how would that react to an interest rate hike?

Or what about buying a put on a long-term bond ETF? Because if interest rates rise, they should decrease in value?

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answered Jul 01, 2017 08:12 PM by
Jin Won Choi gravatar image Administrator

Hi swilliams,

I believe it's very difficult to forecast where interest rates will go, so I personally don't recommend shorting bonds or doing anything of that sort, using options or otherwise. If you're very convinced that rates will rise, you could hold cash instead of bonds to position yourself to save money. You could hold floating rate GICs, but I'd be careful about not having access to the cash you put into the GICs. I'll publish an article about real return Canadian government bonds on Monday.

In the meanwhile, if you have your money invested in short term bonds as you are now, you probably don't stand to lose much by keeping hold of them. The average duration of VSB means that if interest rates rise by 1%, you'd probably lose around 2.8%. 1% is a big increase, so I doubt you'd see a loss of 2.8% anytime soon.

I hope that helps,

Jin

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Hi Jin, When we plan to invest new money, does it make sense buying more VSB even with central banks showing intention to move interest rates? I know it is impossible to predict, but it seems odds are against VSB. In your opinion, it is logic now to hold some cash or to buy GICs instead?

bruno ( Jul 27, 2017 10:06 AM )edit
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