canada mortage bonds | General financial discussion | Discussion forum

By Canada Mortgage Bonds, I presume you mean CMHC bonds, which can be bought from any broker, such as CIBC Investor's Edge and BMO Investorline. They yield about 3% currently for issues maturing in 2015. CMHC bonds are traded daily in the bond market, and their yields fluctuate with the market price. Because CMHC bonds are backed by the Gov't of Canada, they're priced and traded like treasury bonds.

CMHC bonds are liquid because they're traded like treasury bonds in the bond market. But all bond prices fluctuate, so if you sell it before maturity, you may take a capital loss. Also, there is a spread between the buy and sell (bid and ask) prices, which guarantees that if you sell a bond you just bought, you will lose money on the spread.

Bonds have a fixed coupon yield; the price at which you buy it determines the effective yield. For example, there is a CMHC bond issue maturing in Apr 2015, priced at $107.88 with a 4.3% coupon. That means you're paying almost $108 for the privilege of receiving $100 at maturity. In the meantime, you receive $4.30 interest per $100 of face value (not market value) per year (that's $2.15 paid semi-annually, not monthly). The effective yield is 2.83%. The coupon interest of $4.30 is fixed regardless of what price you pay for the bond (thus the term, fixed income), but the price fluctuates in the open market. So if you buy the bond for more than $107.88, your yield is less.

You can check prices in the bond section of your online brokerage account and at GlobeInvestor.com (you get more information if you subscribe to GlobeInvestor Gold). For articles on bonds, go to SmartMoney.com. It's a US Web site, so they don't talk about Canada, but what's true for US bonds is usually true for Cdn bonds. Read the article on the bear market in treasuries. I don't like treasuries, and I don't want you to think I recommend them.

There is no "canada mortgage fund." For CMHC bonds, which are a type of Cdn treasury bond, the best time to buy is early in the rate-cutting cycle. This is the end of the rate-cutting cycle. Cdn treasuries do seem to benefit from flight-to-quality.

Mortgage funds, which are backed by mortgages, are a different matter. They don't benefit from flight-to-quality, and they don't necessarily benefit from rate cuts or suffer from rate hikes. Mortgages tend to be short-term, and mortgage rates aren't set by interest rate policy. Mortgage funds that hold only short-term mortgages can benefit from higher mortgage rates, because they continually get new mortgages.

Where did you hear about your so-called "Canada Mortgage Bonds"?

The bank rate, the interest rate at which the Bank of Canada lends to banks, is set by interest rate policy. In 2000, the bank rate was 6; it was cut steadily to 2.25 by 2002. Then it was raised steadily to 4.75 by 2007. It has been cut steadily to .5 since. (Strictly speaking, interest rate policy sets the target for the overnight rate, which is slightly lower than the bank rate. The target rate is now at .25.) The last time the bank rate was increased was Jul 2007. When interest rate policy reversed, and the first rate cut came in Dec 2007, it was a signal that a rate-cutting cycle had begun. That was the best time to buy treasuries, or lock in term deposits.

GlobeInvestorGold is the only site with bond charts. It has both the price chart and the yield chart. You can try it with a free trial subscription.

Treasuries have lower yields than GICs, but treasury yields are rising. You may have to wait a long time to buy treasuries, but it's better than buying a bond only to find you could've waited for a higher yield (lower price). If you want higher yields now, you must leave the protective confines of deposit insurance and treasury guarantee. The time to lock in yields on guaranteed investments (treasuries & GICs) is long over.

Highly liquid risk-free investments (treasuries & savings accts) will always have yields comparable to, or less than, the prime rate. For their yields to be higher, the prime rate must be raised, and that requires a change in the country's interest rate policy. There are higher-yielding investments you don't know about, but they are not necessarily liquid and certainly not risk-free. By the way, you can no longer use "high interest" and "savings account" in the same sentence.

Yes, bonds can be sold prior to maturity, and that is one advantage they have over non-cashable GICs. There are cashable GICs, which can be redeemed with full interest after 30, 60, or 90 days, but they have lower yields.

There is another advantage bonds have over GICs: treasury bonds and T-bills don't need deposit insurance. An institution may hold millions of dollars in T-bonds and T-bills without default risk.

Canada Savings Bonds are the government equivalent of cashable GICs. (CSBs are not bonds; they are term deposits to the Gov't of Canada, and can be cashed before maturity.)