Fixed Income Overview
Investing with Independent, Unbiased Advice. Unlike many of our competitors, our fixed income department is a service centre and not a profit centre. We do not trade with the firm’s capital or engage in investment banking activities of any kind. As a result, we do not expose ourselves, or indirectly our clients, to the risks and volatility associated with these activities.
By not acting as underwriters or trading for our own account, Odlum Brown is committed to providing value-based recommendations that are consistent with client needs. This eliminates any potential conflicts of interest with our clients.
Preserving Capital. Our approach to fixed income investing is to ensure the preservation of capital. The return on principal, while important, ranks second to the return of principal. At Odlum Brown our first priority is to preserve your capital and produce appropriate returns on your fixed income investments.
Choosing Investment Grade Securities. We focus on investment grade-rated fixed income securities. We recommend government bonds, which are considered to be secure investments. We also recommend many corporate bonds which offer higher yields than government bonds, but also carry a higher element of risk.
Using a Laddered Approach. We recommend a laddered approach with investors purchasing different securities at evenly spaced maturities. Not only does this approach diversify one’s fixed income portfolio, it also produces a recurrent return of principal. This proven approach reduces many of the risks inherent in fixed income investing. Reinvestment risk, or the risk of reinvesting when interest rates are low, is alleviated by the staggered maturity dates. Interest rate risk is mitigated by avoiding a large exposure to long-term bonds, whose value is most sensitive to changes in interest rates. Laddering is a simple but effective method of returning principal on a periodic basis for reinvestment and one which, over time, produces appropriate returns.
Fixed Income Resource Centre
Bond Calculator [Excel File, 48 KB]. Download this free Bond Calculator. To open this file, you will need Microsoft Excel on your computer. First-time set-up instructions are included in this file.
Charts and Graphs (as of January 20, 2020)
Canada 5s of 2037 | The 5s of 2037 fell below the 200-day moving average but remain close to the other moving averages.
Oscillator | Momentum turned positive.
Break-Even Inflation Rate | Inflation expectations were unchanged.
Real Return Bonds | Real yields fell by the same amount as nominal yields.
U.S. Two-Year Ten-Year | The yield curve was unchanged.
U.S. 10-Year | U.S. Treasury yields moved lower and are now below their key moving averages.
Frequently Asked Questions
Frequently Asked Questions
With equities, we are told to diversify. Is this also true for bonds? It is very important to diversify in bonds, both by term to maturity and by credit rating. Though diversification is not as important for government bonds, it is critical for bonds issued by corporations.
How should I structure my bond portfolio? We recommend diversifying bond portfolios both by term to maturity and by credit rating. Doing so reduces the risk to principal as well as the reinvestment risk. This is called the laddered approach and is a tried and true method which protects one’s principal and over time, can produce appropriate returns.
Is there a place for Real Return Bonds in a portfolio? Real Return Bonds (RRBs) deserve to be in a fixed income portfolio but there are times when they are unattractive and should be avoided. One thing to do is subtract the real yield from the conventional bond yield to arrive at the break-even inflation rate. Then, you can tell whether the RRBs are good value or not by comparing this yield to the actual inflation rate.
What is a stripped bond? A stripped bond is properly called a zero coupon bond. It is a security created by separating the various interest payments from a bond, creating separate securities. Because they represent single payments in the future, stripped bonds generate no income before they mature, hence the name zero coupon. They are commonly used in RRSPs and other tax sheltered vehicles for financial planning.
What is duration? Duration is a term that defines the average term of a bond, taking into account the present value of all the parts of a bond, as well as all cash flows from interest and principal payments. It is used as a measure of risk in the bond market.
Why can I not buy bonds at the same price seen in the paper? Prices displayed in the newspaper (or wherever you see them) are time-sensitive and captured as of a specific moment. The bond market is very dynamic and prices fluctuate minute by minute. Also, the published prices tend to be wholesale mid-market prices. These prices may not apply to the smaller quantities typically purchased by an individual investor and would not include any commission.
Why is there no visible market for bonds? There is no centralized market or exchange for bonds. Rather, bonds trade in a decentralized “over-the-counter” market where the market participants (investment dealers) establish prices at which they are willing to buy or sell. Thus, investment dealers act as principals unlike the stock market where investment dealers act as agents.
When the Bank Rate goes down, why do bond prices not go up? The Bank of Canada can only influence the shortest maturity dates. Bond prices react to changes in longer term interest rates which are affected by factors including inflation and economic developments. Supply and demand forces within the bond market will also influence bond prices.
If you have any other questions, please contact your Investment Advisor or Portfolio Manager.