Opinions
Lorne Steinberg
Bonds - Strip
BONDS-T
DON'T BUY
May 07, 2024
Stock price when the opinion was issued
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Right now, corporate bonds are very expensive compared to government bonds, the tightest spreads have been in years for both investment-grade and high yield. He'd favour owning government bonds. Provincial bonds yield more than the Government of Canada bonds do. Pretty attractive yield compared to corporates. 6 years and under is the sweet spot for the term.
Yield curve is inverted. A year from now, he expects the yield on this to be a lot lower than it is now and you'll have a positive return. But in the short run, there's room for the yield to rise on it somewhat.
If you have other bonds, don't be worried. But if it's the only one you own, a short-term call is to consider selling it. If you're comfortable holding it and it jibes with the rest of your portfolio, continue to do so.
If you want a fixed income allocation and that's why you bought them, then you should hold them because that's who you are.
If you have them and think there'd be a better opportunity, such as if the stock market really takes a massive beating further from here, that could be a source of cash to deploy into equities at much higher yields (even if the share price wanders around in the wilderness for a while).
Coupons are stripped off from the bond. So an investor does not get a regular income stream. They buy the strip at a discount perhaps at $70, and then it matures in 5 years at $100. Pricing is not well understood by investors, so dealers can make some extra money. Harder to judge what you're paying. Why not buy a regular bond, where the market is more liquid and more transparent.
Do not buy them in a taxable account because you're supposed to impute the interest you'd be receiving every year. So it doesn't work.