Bonds were an almost pointless investment in the past 10 years, if you measure strictly by returns.
The next 10 to 20 years could look a lot better if you take advantage of the high yields available today from long-term bonds. Does the idea of getting a 5.6 per cent yield from a blue-chip company for 13 years pique your interest? It was available recently from a Bell Canada bond maturing Feb. 26, 2037.
Long-term bonds are hellaciously sensitive to rising interest rates, a point that is perfectly highlighted in the cumulative 27 per cent drop for the FTSE Canada Long Term Bond Index for the three years to Oct. 31. But if we’re not at the peak for interest rates, we are darn close. When rates start to move lower, long-term bonds will rise in value.
That’s one reason to look at long-term bonds now, but there’s a better one. The price declines of recent years have driven yields up to levels that would have been seen as unattainable in recent decades. Remember, bond prices and yields move in the opposite direction. The rout in bond prices has given us bonus yields today. Locking in these yields for the long term could make sense if you:
- Understand that rising rates – in the near term, or further out – will drive the price of these bonds down.
- Don’t see yourself needing to sell the bond before maturity, thereby putting yourself at risk of selling at a loss if rates are rising
- Understand that price declines are not a commentary on a bond issuer’s ability to pay interest and redeem maturing bonds
- You stick to government or investment-grade corporate bonds, which means a bond rating of BBB or higher.
That Bell Canada bond offers a good example of what’s out there right now in long-term corporate bonds. The coupon on the bond – the interest rate paid when the bonds were first issued – is 6.17 per cent. The yield is 5.6 per cent because you pay a slight premium over the issue price when buying. The more you pay for a bond, the lower the yield. Yield reflects both the coupon and price paid.
Prefer to buy bonds trading at a discount to their issue price? Brookfield Finance bonds maturing Dec. 14, 2032, have a coupon of 5.4 per cent and a yield of 5.9 per cent.
Bell Canada’s bond rating from DBRS is BBB-high, while Brookfield Finance has a rating of A-low. Both are firmly in the investment grade category. Manulife Financial, with an A rating, has a bond available that matures March 10, 2033, with a coupon and yield at 5.4 per cent.
If you’re willing to commit for longer than 10 to 15, years, the bond market can accommodate. The grocery chain Metro Inc. has a bond maturing Dec. 1, 2044, with a coupon of 5 per cent and a yield 5.4 per cent. Metro’s credit rating is BBB-high.
Long-term bonds like these present some credit risk, a term that means the risk of a default on interest payments or redemption on maturity. Choosing a blue-chip issuer with an investment-grade credit rating helps offset this risk, it’s there in the background.
Rob Carrick