{"id":27989,"date":"2015-02-27T02:43:43","date_gmt":"2015-02-27T07:43:43","guid":{"rendered":"http:\/\/prefblog.com\/?p=27989"},"modified":"2015-02-27T02:43:43","modified_gmt":"2015-02-27T07:43:43","slug":"february-26-2015","status":"publish","type":"post","link":"https:\/\/prefblog.com\/?p=27989","title":{"rendered":"February 26, 2015"},"content":{"rendered":"

Assiduous Reader DW brings to my attention a piece titled BXF no longer a strip tease<\/a>, which points out:<\/p>\n

When First Asset created Canada\u2019s first strip bond ETF in 2013, they claimed that the ETF was expected to be more tax-efficient than other short term bond products currently available in the marketplace.<\/p>\n

With a full tax year behind us, and armed with a new methodology for calculating the after-tax returns of ETFs, we can put First Asset\u2019s claim to the test. Spoiler alert: the results are not only impressive, but they make you wonder why other firms haven\u2019t followed suit by offering their own brand of strip bond ETFs.
…<\/b>
The results above should not be considered a fluke \u2013 as long as the other bond ETFs continue to have an average coupon that is significantly higher than their yield-to-maturity, BXF will be expected to outperform these plain-vanilla ETFs on an after-tax basis (for more information on this concept, please read Why Use a Strip Bond ETF? by Dan Bortolotti).<\/p><\/blockquote>\n

This has previously been an issue in the preferred share world – see the article Beware the tax trap of these tempting preferreds<\/a> and the post Tax Impact on FixedResetPremium Yields<\/a>. Remember the good old days, when FixedResets traded at a premium?<\/p>\n

Strips are generally too expensive to hold in any account<\/a>, let alone a taxable one, but the fact that they are treated as par bonds as of the purchase date is a very useful wrinkle. Regrettably, most strips are governments and to a large extent the tax savings will be offset by the liquidity premium – which retail shouldn’t pay for, because the ability to transact $50-million in one ‘phone call without moving the market isn’t exactly an attribute that should be of much interest to retail.<\/p>\n

I have advised many clients in the past to open accounts at full-service brokers with the sole objective of gaining access to current coupon corporate new issues. This has worked out OK for them – the biggest problem is putting the fear of God into the broker so he never calls unless he’s got a new issue that meets pre-defined standards!<\/p>\n

US brokers are attempting to whip up some fear-inspired trading in bonds<\/a>:<\/p>\n

While the Federal Reserve considers raising overnight borrowing costs from about zero, where they\u2019ve been since 2008, central banks in Europe are dropping deposit rates into negative territory.<\/p>\n

This backdrop has pushed a measure of expected Treasury price swings to levels that are about 40 percent higher this year than in the same period in 2014, according to Bank of America Merrill Lynch\u2019s Option Volatility Estimate MOVE index.<\/p>\n

\u201cThe risk in bonds has gone up,\u201d Francesco Garzarelli, London-based co-head of macro and markets research at Goldman Sachs Group Inc., said in a Bloomberg Television interview Thursday. \u201cThe sensitivity to small changes in yield expectations from here will command very sizable price swings, and I just think that makes fixed income a very dangerous asset class.\u201d
…<\/b>
While the biggest banks have cut back on their positions in risky, speculative-grade debt, it\u2019s steadily migrated to large institutions, insurance companies and mutual funds. Such firms have boosted their holdings of corporate and foreign bonds to $5.1 trillion, a 65 percent increase since the end of 2008, according to data compiled by UBS.<\/p>\n

This has more than offset the $800 billion decline in holdings at banks and securities firms in the period, a regulator-prompted retrenchment that was intended to reinforce the financial system, UBS analysts Matthew Mish and Stephen Caprio wrote in a Feb. 26 report.<\/p>\n

What we\u2019re left with instead — ballooning bond funds that own more and more risky debt — may be a less bad option, but one that still threatens to wreak havoc in credit markets.<\/p><\/blockquote>\n

Rob Carrick highlights a TD publication in his piece What if interest rates never return to \u2018normal\u2019?<\/a>:<\/p>\n

I\u2019m on record as having warned many times about rising rates, but I\u2019m now in adjustment mode. What has me reconsidering is the kind of thinking found in a new report by TD Economics titled The New Normal: Low Rates in Advanced Economies for the Long Run. It argues that rates are low today because of weak global economic growth, and that they will move higher as the economy improves. However, rates will not return to levels we used to consider \u201cneutral.\u201d The reason: Aging, and in some cases, shrinking populations across the industrial world. They\u2019ll keep a lid on growth in economic productivity and thereby reduce the need to crank rates higher.<\/p><\/blockquote>\n

The TD report THE NEW NORMAL: LOW RATES IN ADVANCED ECONOMIES FOR THE LONG RUN<\/a> forecasts modest rates for years to come:<\/p>\n

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