Government bonds are generally regarded as safe but rather boring investments. That is because we tend to think of bonds in terms of their yields instead of the total returns they provide. A bond’s yield is the interest rate it pays if it is held to maturity. A bond’s total return, however, consists of interest paid plus any capital gain or loss if the bond is sold before maturity. Rising yields mean market bond prices decline, and thereby create capital losses, while falling yields create capital gains, which is the opposite of what you might think. Investors near or past retirement age should consider this. Real returns (net of inflation) on long-term Government of Canada bonds were negative in 29 calendar years between 1948 and 2021, which makes them neither safe nor boring.
(Source: Canadian Institute of Actuaries Canadian Economic Statistics, 2021 edition)
Frederick Vettese is former chief actuary of Morneau Shepell and author of Retirement Income for Life.