Oct 11 2010


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Mispriced Bonds

Since June, 2010, I’ve been selling off large chunks of my bond portfolio. And today, my bond allocation is lower than it’s been in years.

With a U.S. federal 10 year treasury note paying just 2.38%, bonds are very unattractive. And my Canadian bond index isn’t paying a heck of a lot more.

The earnings yield on the S&P 500 is double the bond yield—so I don’t think it makes a lot of sense to put money into bonds right now.

Selling off more than $120,000 in bonds, (in June) I bought decent sized positions in:

Currently, my bond allocation is about 30% of my total portfolio.

Considering that I don’t like to speculate, and I don’t have a pension, I’ll never be an “all or nothing” kind of investor who moves fully out of the stock market or out of the bond market. I’ll leave that for the Vegas types. For me, having a 30% bond allocation is like parachuting—likely safe, but still frightening as hell.

How about you? What are your thoughts on bonds? And have you trimmed your bonds based on the relatively low yields?

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About the author

andrew hallam

I'm a freelance finance writer, lucky enough to have been nominated as a finalist for two Canadian National Publishing Awards. I'm also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School, a book explaining how I became a millionaire on a teacher's salary, while still in my 30s. Working to empower people financially, I'm available to motivate and inspire people on basic retirement planning and index investing. I'm happy to comment on your questions, first, please read the Terms of Use.

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  1. avatar
    The Biz of Life

    I think Warren Buffett would agree with you based on the comments he made when visiting China. US and Canadian bonds are very unattractive at the moment. Aussie bonds and money markets aren't too bad. The earnings yield of stocks makes them a better investment over bonds. Sooner or later interests are going up and bond investors are going to burned.

  2. avatar
    Andrew Hallam

    @The Biz of Life

    Hey Biz,

    It's interesting that you're watching Aussie bonds. I haven't seen their prices or yields, but I was talking to an Aussie yesterday who said that he had money in a high interest savings account paying about 5% annually. Perhaps it was a money market fund, but either way, that's a high interest yield.

    What about you? Do you own bonds, and if so, have you trimmed them at all Biz?

    1. avatar

      ING are still offering a 4.75%p.a. Variable Welcome Rate

      Is this a better option than Vanguards AUS BondsIndex, which are -5% over the last 3 months and near on -8% over the last 12?


      1. avatar
        Andrew Hallam

        It could be Barry. But if it’s Variable, the interest rate will likely shift. Frankly, if you are buying bonds, however, you should be pleased to see that one of your prospective products has dropped 5% over the past three months. Think of stocks and bonds the same way Barry. If you’re buying them, you should be celebrating when they get cheaper. Global bonds have corrected in price. I’m relieved by that, and hope the prices of bonds drops even further. That doesn’t mean I will hold out for lower prices…because you know that I don’t speculate. It’s more profitable not to.



        1. avatar

          I’m topping up VGB at present and even sold some of the US index and put into Bonds as the US Index (Vanguard Aussie) had a great run (Aussie dollar dropping V US also).

          I have pondered the worth of o’seas and corporate Bonds along with my VGB


  3. avatar
    Myke@In Search of Sa

    Hi Andrew,

    Glad to see you made it home from China safe and sound. I was a little worried that the Sino-Gestapo would track you down for the post you made from there. Again… only half joking.

    My bonds have been perplexing me lately… I hold my bonds for the long term, so had no plans on trimming them. BUT, even though interest rates in Canada have risen a good amount over the past 6 months (I only have Canadian bonds) my bond portfolio has risen 20% over the same time frame.

    This goes against everything I understand about bonds, so I am recently thinking about taking my profits, and buying again when prices move down.

    When the BOC announced their first interest rate hike (from 0.25% to 0.5%) , I expected my bonds to go down… but they went up… and up. Very confusing.

    Something to note about my bond portfolio: Currently, I only hold long-term corporate strip bonds, and they are held within my RRSP. ie. I don't care about yield, and don't have to deal with taxes… yet ;-)

    I am still deciding if I should sell or not. On one hand, my initial plan was to hold them until maturity, so daily prices shouldn't influence my choices. On the other hand, I have to question if investor sentiment isn't too foolish, and I should take some gains now. I also wonder if the Boomers have maybe had enough of the stocks market, and have made a permanent switch to bonds.

    I have no answer yet, but your post is timely. I appreciate it.

  4. avatar
    The Biz of Life

    I've been looking at some Aussie currency funds, which are essentially Aussie money market accounts. Haven't pulled the trigger yet, but they look enticing to me. I own no US or Canadian government bonds because their yields are dreadful and the likelihood of capital loss is high when rates go up. Right now I have a 25% allocation in short-term corporate bonds and emerging market bonds, lower than my normal 40% allocation.

  5. avatar
    DIY Investor

    I haven't cut back on bonds but have moved down the yield curve so that total bond (AGG) is about half of my bond position. I have a bigger position in short-term corporates (CSJ) and in high yield as a cushion. I have increased exposure a bit in an ETF of Trust Preferreds (PFF) but am trying to be cautious. When rates move higher they will get hurt a bit.

    I should probably dabble in emerging market bonds a bit like Biz of Life and do have some inflation protected holdings in some client accounts.

    It looks to me like stocks and bonds are seeing the world differently. Stocks are saying that the recovery is taking hold and bonds are saying that we are going off the cliff.

    Of course bonds are pricing in QE2 and may be disappointed. Many times when the event happens prices move opposite of expected because the event is priced in. This may happen even if the Fed announces QE2 at the next FOMC.

    Ah…never a dull day.

  6. avatar
    Andrew Hallam

    @The Biz of Life

    Hey Biz,

    Based on the price of the Aussie dollar right now (near record highs, I believe) do you think there's a great currency risk?

  7. avatar
    Andrew Hallam

    @DIY Investor

    Hey Robert,

    Never a dull day indeed! Let me know if you and your wife can come to SE Asia for a visit. Of course, I'd do my utmost to rope you into talking to our staff, ala Google-style. And you could stay with us. You won't be able to bring the motor home, but accomodation with us would be free.

  8. avatar
    Mich @BTI

    HI Andrew,

    My RRSP account has a similar composition as yours regarding bonds. I've kept the allocation at 30% so far and intend to keep it for the long term. This is retirement money, no playing around! 70% diversified Canadian equity funds and 30% Canadian bonds.

  9. avatar
    Andrew Hallam

    @Mich @BTI

    Hey Mitch,

    That sounds pretty responsible. And if the markets ever get pounded we could find ourselves with 50% bonds–and the wonderful prospect of rebalancing, and buying "on the cheap" to get us back to 30% bonds. Join me in a prayer for a stock market hammering!

  10. avatar
    larry macdonald

    Good idea to keep part of portfolio in bonds and maintain some diversification in the event economies remain deflationary and bond yields decline even more, a la Japan.

  11. avatar

    I'll be the outlier here with my 1% of bonds. I currently have no interest in purchasing any, either. I don't mind at all if the stock market stays stagnant for the next 10 years or so; I'll keep buying at lower prices if I can. At that point it will be nice if it starts going up. :)

  12. avatar
    Andrew Hallam


    Hey Kevin,

    Even if you did want some bonds, I don't think now would be a great time to go after them.

    1. avatar

      Wondering what advice you would give re: bonds to somebody who holds nearly 100% equities today and is considering diversifying into the kind of responsible portfolio you recommend in your book. With declining bond prices and speculation on rising interest rates, is this the time to buy, or would it be better to wait?

      1. avatar
        Andrew Hallam

        Hi Daniel,

        I don’t actually speculate. If I were given a load of fresh money today I would create a diversified portfolio with it. If you look to the news for guidance, you’ll never be able to create (or rebalance, especially) a diversified portfolio. There will ALWAYS be something “logical” in the business news suggesting otherwise. Consider this your first test. As as I mentioned in my book, keep your bond terms short–short term bond indexes, not long.



  13. avatar
    Peter Steinebach

    Darüber würde ich wirklich gerne noch viel mehr erfahren!

  14. avatar
    Andrew Hallam


    Sie können die Fragen stellen und ich werde mein Bestes tun, um sie zu beantworten

  15. avatar

    Corporate bonds offer a better yield than govt bonds.
    New to this site – couldn’t see if you’ve addressed this issue.

    So the question is…

    Do you think Corporate Bonds are a suitable substitute for Gov’t bonds? (Vanguard VCLT and VCIT are two options)

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