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Long term bond rates and the state of the economy
August 13, 2014
8:43 pm
Jack Manning
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Edit by admin: this topic was forked from this thread

I was watching Bloomberg the other day and they were talking about the German 10 year bond rates at 1.08%.

I don't know what will happen in the future but it seems that they are trying to get depositors and other fixed interest investors to sued to low rates and say that it is the new normal.

August 14, 2014
9:29 pm
Loonie
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I am sure the German economy is in a different place than ours but I wouldn't know the details. Aren't they having to bail out Greece or something like that? Does that affect their interest rates? I have no idea. But I do suspect that we have not seen the bottom yet. As I said in a different post, we have 3% yet to go to reach bottom (now less than 3% in almost all situations). It's not enough to keep up with inflation, now clearly on the rise, and that worries me. And if you go through a broker or "advisor" of any sort for these kinds of deposits, it's a complete waste. You will have nothing left, especially in a taxable account. Some suggest it's a negative result after all these factors.

I have been wondering why all of these institutions seem more focused on getting short term money than long term. All the "deals" are on short term, and the gap between long and short term rates keeps getting smaller and smaller. At this rate, soon it will all be the same. What are we to make of that?

August 14, 2014
9:45 pm
Jack Manning
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Loonie, it seems that it is getting much more difficult to get GIC's close to 3.00% anymore. My adviser was suggesting to me to buy a 2027 Bell Canada zero coupon 4.16% for some of my TFSA but I am not sure I want to go that long with a corporate bond.

August 15, 2014
12:22 am
Loonie
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I would be leery of that one too. A lot could happen in telecommunications between now and 2027. It's an area that is going through rapid change, it seems to me.
Unless you have a huge amount in a wide variety of laddered bonds to buffer any problems, creating your own little "fund", I wouldn't do it. But I'm a bit of a chicken when it comes to these sorts of things!
And, remember Nortel.

August 15, 2014
10:15 am
kanaka
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Loonie said

I would be leery of that one too. A lot could happen in telecommunications between now and 2027. It's an area that is going through rapid change, it seems to me.
Unless you have a huge amount in a wide variety of laddered bonds to buffer any problems, creating your own little "fund", I wouldn't do it. But I'm a bit of a chicken when it comes to these sorts of things!
And, remember Nortel.

Not too sure if we should be concerned about the economy in Germany. I realize some economies can be of some impact on us but only concerned about what I can do here. Just google investment interest rates in Australia and Iceland. While I don't profess to understand the economy I do remember our 18% mortgage and during our years of struggling with finances and building family we never had a mortgage for less than 9%. To me it appears the Feds are coddling the younger generation to protect their investment in their home and bank loans and as we older folks would like to see our hard earned savings grow 2.9% doesn't cut it!!

I went to a business meeting years ago and one of the speakers was a futurist. He suggested NOT to invest in TELCOs. But that was before we were proliferated with mobile phones, very high speed internet, and being offered tv programming by Telus or Bell. Telcos have and will have to continue to reinvent themselves to be a viable investment. And since they are a group of 3 or 4 companies that are a monopoly with pricing (ripping us off) and the Feds give us false promises about doing something about it. I guess for now they are a good investment.

What will be here for a long time...banks...oil...gas...electricity....?? Where to invest and what blends are attractive?

Personally I still DONT see the point of bonds but do admit I have some ETF bond investments. To hold a bond for 13 years makes me 78....not for me! And who knows if interest rates don't improve in 5 years?

While I think we knew where we were going with Mr Flaherty this new guy is tooooooo quiet......just like Harper.

August 15, 2014
1:52 pm
Jack Manning
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Kanaka, my adviser suggested that 4.16% 2027 Bell Canada zero coupon bond because I asked him for a safe alternative to GIC's that paid more than 3.00%. I wanted my TFSA, income tax free money to grow from $15,000 to $25,000.

I guess that is the best he could come up with during the last few days. I noticed that since yesterday it is lower to 4.11%.

Everyday interest rates on zero coupon bonds are dropping fast.

August 16, 2014
3:10 pm
kanaka
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Jack Manning said

Kanaka, my adviser suggested that 4.16% 2027 Bell Canada zero coupon bond because I asked him for a safe alternative to GIC's that paid more than 3.00%. I wanted my TFSA, income tax free money to grow from $15,000 to $25,000.

I guess that is the best he could come up with during the last few days. I noticed that since yesterday it is lower to 4.11%.

Everyday interest rates on zero coupon bonds are dropping fast.

Jack, there is no doubt that I have stayed away from bonds because I don't understand them and have concerns about how liquid they can be, far out maturities, and how secure they are. So your example of 4.16% ..... Is that 600 plus a year times 13 years or is it compounded or is the matured value $25000. I will look if up on my iTRADE account as well.

August 16, 2014
3:25 pm
kanaka
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Jack is this the one you are talking about..... https://www.dropbox.com/s/m8ww5kvhdobtoyp/Capture.JPG

August 16, 2014
4:45 pm
Jack Manning
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Kanaka, yes it is, Bell Canada 2027-May-15. It is a compounded rate. The maturity value is $25,037.55 that my adviser quoted me.

He also gave me a few more which I did not mention such as Canadian Tire 2028-April-13 4.107%, Investors Group 2031-May-9 4.532%, Transalta Co. 2019 May-18 3.497%, Loblaws Co Ltd. 2032-March-1 5.00%.

Just to disclose my age, I am 39 years old.

August 16, 2014
4:52 pm
kanaka
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Jack Manning said

Kanaka, yes it is, Bell Canada 2027-May-15. It is a compounded rate. The maturity value is $25,037.55 that my adviser quoted me.

He also gave me a few more which I did not mention such as Canadian Tire 2028-April-13 4.107%, Investors Group 2031-May-9 4.532%, Transalta Co. 2019 May-18 3.497%, Loblaws Co Ltd. 2032-March-1 5.00%.

Just to disclose my age, I am 39 years old.

Lol......for you, that makes a lot of sense!!!!!!! But what if interest rates go up in 2 years? I hope you have diversified? I also looked up on iTRADE for a 5 year strip in the A ratings only and the best one was Bell. BUT the current GIC rates are better.

August 16, 2014
4:58 pm
Jack Manning
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Kanaka, this is why I stated in prior post with Loonie that I was not sure about buying these corporate zero coupon bonds for a long term.

Yes, I agree rates should go up but it has been about 4 to 5 years since a 5 year GIC was in the 4.10% to 4.25% range and 7 to 8 years for GIC's in the 4.75% to 5.00% range.

This is some of my TFSA money so I was looking for a higher rate today.

August 16, 2014
5:29 pm
Jack Manning
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Kanaka, actually, it has been almost 6 years since 5 year GIC rates were at least 4.10% to 4.25%. I remember in 2007 June-15 I got a 4.80% 5 year GIC at Home Trust Company.

After that GIC rates dropped fast after 7 months they were around 4.25%.

August 17, 2014
8:04 am
kanaka
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Jack Manning said

Kanaka, actually, it has been almost 6 years since 5 year GIC rates were at least 4.10% to 4.25%. I remember in 2007 June-15 I got a 4.80% 5 year GIC at Home Trust Company.

After that GIC rates dropped fast after 7 months they were around 4.25%.

Another thing I continue to look at is the spread between yearly terms. For awhile I found the 4 year rate you were often gypped but the following case you are gypped on the 3 year rate. While the highest % is the highest return but when you look at the spread what is the best choice or value. There must be some way to rate BEST value of rates offered for a GIC or determine what is the POOREST choice to make. In this case, in my opinion, the 3 year term is a POOR choice.

Ie. current rates are at a popular CDIC financial institution.
1 year 2
Plus .35
2 year 2.35
Plus .05
3 year 2.4
Plus .20
4 year 2.6
Plus .30
5 year 2.9

So .225 is the average spread and extrapolate that for 13 years.......4.19% for a 13 year bond is NOT good value in my opinion. Should be 4.7 or better.

Just thought I would throw out another way of looking at it......

I thInk I will remain with the GIC and consider a five year a short term vs a bond and keep my fingers crossed that rates will go up. I need to get my laddering in place to catch the opportunities!!!!

Soooooo....how do you work out a five year ladder and double up in one of the terms to avoid the 3 year rate?

August 17, 2014
9:30 am
Jack Manning
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Kanaka, I understand what you are saying but I keep hearing from the major world central banks, U.K., U.S. so far that interest rates will rise but will be lower than historically.

Now, I am hearing from different business news items that the U.S. Federal Reserve and U.K. Bank of England will have their central bank rates at most 2.00% to 2.25%.

In 2007 before the financial crisis, Canada's central bank rate was 4.50% and U.S. was 5.25%.

I heard an interview yesterday at Michael Campbell's Money Talks show, http://www.moneytalks.net that 2 years from now, the Bank of Canada's rate will still be 1.00%, no interest increases at all.

I am more unsure then ever before about GIC rates, bond rates as they blip up a little bit and then fall to almost 2 or 3 year lows again.

August 18, 2014
5:26 pm
Loonie
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I am no economist, nor a banker or anything like it, but it seems to me that economies all over the place have been in trouble for most of the last decade or so.
I suspect that we kid ourselves if we think Canada will somehow be exempt in the longer term. Already, wages are simply not keeping up and have not been. we have been getting the "soft landing" approach for years now, it seems to me, and I don't really see where this will be likely to end.
Bank of Canada projects about 2% GDP for next 2 years, which does not seem that impressive, although again I am no expert. And that's IF we make it.
I just can't see in my little crystal ball where this companies will be in X years, even the larger ones.
And I would be especially disinclined to take the risk in TFSA or RRSP where there is no way to deal with the loss, tax-wise, if it comes to that.
Hopefully, these companies would just buy each other out and everybody would win, more or less. But I find the world so unstable and unpredictable, I just don't know.
But I'm a lot older than 39 too. At 39, I had mutual funds. Not now.

August 18, 2014
8:30 pm
Jack Manning
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Loonie, I personally think that we are in an economic malaise with slow GDP growth and stagnant to low wage increases and some getting wage, salary cuts of 5% to 15% over the last 5, 6 years.

We may not be in a depression or recession in technical terms but for many it sure feels things are getting more difficult.

August 19, 2014
7:46 pm
Loonie
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I agree, Jack.
But I am not counting on government or journalists to spill the beans on this one.
Wage losses have certainly been experienced as very high by people who had to find new jobs when they would have liked to have retained the old ones, but I think a lot of the disappearing income evaporates into inflation.
An example that came my way today: support staff at Ontario's community colleges, who are unionized, just tentatively accepted a four-year deal with wage increases of one per cent in the first year and second years with 0.5 per cent hikes in the third and fourth years. There will also be one per cent lump-sum payments in the third and fourth year of the contract. (These 1% payouts would be in order to avoid setting a higher base for future negotiations.) It has still to be ratified.
For those who are not even unionized, this may look somewhat desirable. However, I am certain this agreement will not even keep up with inflation. And it seems to have been accepted without a whimper, at least by union management.

August 19, 2014
7:49 pm
kanaka
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Loonie said

I agree, Jack.
But I am not counting on government or journalists to spill the beans on this one.
Wage losses have certainly been experienced as very high by people who had to find new jobs when they would have liked to have retained the old ones, but I think a lot of the disappearing income evaporates into inflation.
An example that came my way today: support staff at Ontario's community colleges, who are unionized, just tentatively accepted a four-year deal with wage increases of one per cent in the first year and second years with 0.5 per cent hikes in the third and fourth years. There will also be one per cent lump-sum payments in the third and fourth year of the contract. (These 1% payouts would be in order to avoid setting a higher base for future negotiations.) It has still to be ratified.
For those who are not even unionized, this may look somewhat desirable. However, I am certain this agreement will not even keep up with inflation. And it seems to have been accepted without a whimper, at least by union management.

Holy! Don't let the BC Teachers see this. They would be crying for the next 5 years and still picketing!

August 19, 2014
8:10 pm
Jack Manning
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Loonie, I remember about 10 or 11 years ago working at a different office that many of my coworkers were saying how falling mortgage rates were a good thing and would benefit many consumers.

I told them that falling interest rates, mortgage rates in this case was a sign of a slowing economy and bad, worsening economic conditions.

They scoffed at me and said that lower inflation is the main reason why interest rates were dropping.

Now we are in 2014 and salary, wage increases are shrinking and getting rarer plus like I said before, the last 5 or 6 years many are working for less and less. Since 2007, many things are way more expensive, maybe 20% to 25% more on average.

Now look at us now. We are getting 2.50% to 2.90% soon 2.80% 5 year GIC money, 5 year 3.00% for RRSP's, TFSA's if we shop around hard enough. Even dividend yields have dropped alot too from 6%+ to 3.50% to 4.25%.

I don't see any real improvement over the next 3, 4 or even 5 years. I don't want to be pessimistic but my patience is wearing thin.

August 19, 2014
10:19 pm
Loonie
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I hope the people who thought the low mortgage rates of 10 years ago were a good thing followed up on their luck by making prepayments etc so that they have now paid off their modest mortgages (compared to buying a house today in most major centres in Canada). Yesterday is never too soon to have discharged a mortgage, no matter what the rate.
Unfortunately, from where I sit (mortgage-free for some years now), all that this "rate holiday" has led to is frighteningly overpriced homes.
I may benefit personally, but it's not a healthy situation.

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