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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Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I'm happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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25 Responses

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  2. 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.

  3. @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?

    • Barry says:

      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?


      • 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.



        • Barry says:

          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


  4. 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.

  5. 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.

  6. DIY Investor says:

    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.

  7. @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?

  8. @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.

  9. Mich @BTI says:

    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.

  10. @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!

  11. larry macdonald says:

    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.

  12. 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. 🙂

  13. @Kevin@InvestItWisely

    Hey Kevin,

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

    • Daniel says:

      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?

      • 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.



  14. Peter Steinebach says:

    Darüber würde ich wirklich gerne noch viel mehr erfahren!

  15. Peter,

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

  16. Mark says:

    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)

  17. Darien says:

    Hey Andrew,

    Great book, great blog.
    Thanks to you I am well on my way to building my passive portfolio.

    I’m a South African expat with my Saxo Bank holding $80 000 in cash.
    I’ve selected my equities but am still unsure on bonds.

    I will not return to SA anytime soon. However the SA Bonds suggested in your book have easily outperformed the UK options you suggest. I assume that this is because SA has high interest rates? If this is so, surely it is a no brainier to go for the SA Bond.
    Interest rates have been higher in SA than the UK for as long as I remember.

    What would be the risk of buying an SA Bond vs a UK option?

    Your thought would be most appreciated.

    • Hi Darien,

      A couple of things:

      As I mentioned in my book, don’t pick one bond ETF over another based on its past returns. As with stocks, one market could run circles around another for 10 years, only to flip places the following decade.

      Second, you are incorrect when suggesting that the South African bonds have outperformed the British pounds. In fact, the UK bonds have hammered them.

      Assume you lived in CapeTown. You put 100,000 Rand into 2 bond ETFs five years ago: a UK bond and a SA bond ETF. Five years later, you want to see whether you made more money in the UK bond ETF or the SA bond ETF. You would notice that you made roughly 30% more money in the UK ETF, over just a five year period.

      The South African Rand has dropped more than 35%, relative to the pound. http://www.oanda.com/currency/historical-rates/
      So when you tell me one bond has returned higher interest than another, you are forgetting that those bonds are each priced in different currencies. Neutralise the currency, and then you can see which bond ETF has really outperformed the other.

      But what I did try to make as clear as possible in my book (and may have failed, in this respect) is to suggest that investors don’t chase past performances. Yet…that’s exactly what your instincts (based on your question) are prompting you to do.

      For full diversification, why not buy both ETFs? And when one outperforms the other (before hitting your rebalancing date) add money to the under-performer, taking some of the proceeds from the out-performer.


  18. Darien says:

    Hello Andrew,

    Much thanks for knocking me back into line. (Don’t chase past returns…)

    Something not addressed on this site that I can find.
    What would happen to my trading account should I shuffle off my mortal coil?

    I’m assuming my will would be enough for my wife to take over?

    Warm regards,

  19. Darien says:

    Hello Andrew,

    Apart from having an emergency fund, would you suggest someone throwing ALL of their savings into their portfolio?
    I have around USD500, 000 just sitting in a bank account and a property paid off in my home country of South Africa.

    Would it be wise to sink some of it into another property or go for the jugular and hold thumbs?

    Warm regards,

  20. Owen says:

    Hi Andrew,

    I realize this is a very old post but I’m wondering your current thoughts on Bonds. Both XSB and VSB seem to have not done anything in either direction for quite a while. We are just getting started with DBS Vickers and don’t have any Bonds at the moment but looking to invest another chunk soon.

    Thoughts? Sorry we missed your book signing in Singapore but a few friends from SAS said you were great!


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