Rational Advisor

Many advisors have been taught, that Equities are the only thing worth holding over the long term. And Bonds don’t give you much as a return.

With interest rates not dropping, advisors have said that bonds don’t make much sense anymore.

So, why have bonds at all?

Recently the Canadian Bond market has been having a difficult time

The trouble we have is that the short term bonds (two years and less) have a higher or equal rate of interest than the long term bonds (10 years or more) - this is called an inverted yield curve. Usually you want higher long term rates than short term.
So, many investors are running to cash instead of bonds.

So not too many investors want to buy long term bonds, with interest rates that are not so competitive.

But the case for Bonds is not over. We’ve recently seen a lot of volatility in the stock markets And the redeeming feature about Bonds is that they are a safe haven. Nobody is going to get rich holding a T-bill, but neither are they going to get poor. Eventually Canada’s stock market momentum will stop, when that happens, the canadian market will have a lot of volatility, and only bonds will be the saving grace.

In Canada, there is a shortage of long bonds. Debt reduction by the federal government has turned long bonds into an endangered asset. Life insurance and pension funds have been buying long bonds to match their own liabilities, pushing up proces and brining down yields.

The debt reduction trend does not appear to be over, so you can expect some lift in long bond prices. As the population gets older demographics will demand more yield oriented investments and less gain oriented. This yield grab will increase the demand for bonds. More demand, means more appreciatioon in price,

Bonds and stocks act like a teeter-totter, as long as interest rate are not too high. For a more riskier stock market a dose of bonds is rational

Rational - Give a man a fish and he eats for a day. Teach a man to fish and he eats for life. But give a man the $5.99 all-you-can-eat seafood buffet at the House O’ Cod and he’s in the bathroom for a week. Trust me on this one.

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