Bonds & Interest Rates – an Introduction

A number of investors have been asking me about bonds and bond mutual funds lately, so here is a bit of a primer.

Interestingly, in dollar terms, the bond market is far larger than the stock market.
Bonds are debt instruments, similar to a loan to be exact - a promise to pay back principal along with interest. Bonds can be issued by governments or corporations. Keep in mind that there is a big difference in credit worthiness between government bonds and corporate bonds issued by companies.

A government bond is backed by a government. In Canada for instance, federal and provincial bonds dominate most of the trading.  A corporate bond is backed by the corporation who issued it. You should be aware that if the company goes bankrupt, your bond may be worthless. On the other hand, a Canadian federal government bond is backed by our own government and is not likely to ever default on its own bond. Even though Canada has a AAA (triple “A”) credit rating (the highest possible), there is another "risk" you should be aware of. This risk is related to the everyday fluctuation in interest rates which will affect the day-to-day pricing of your bond.

There is an inverse relationship between interest rates and the value of a bond:

If interest rates go up, bond prices go down.
If interest rates go down, bonds go up in price.
Bonds move in the opposite direction to interest rates.

Think of a teeter-totter in order to understand this basic bond concept.

A rising interest rate trend is generally bad news if you are holding a bond or bond portfolio. So, if you're holding a bond that's paying 5% and interest rates go up to 10% well, this means you are stuck with a bond that's only paying 5%. Who’s going to buy your 5% bond if rates are now 10%? Not anyone who knows how to count!

If you had to sell the bond well before maturity, you would have to sell it at a lower price than what you paid for it in order to compensate the buyer for the lower interest rate. There are fancy computer programs to figure out how much you would have to drop the price of your bond in order to give the buyer the equivalent yield of 10%
Because bonds trade like stocks and are priced daily, this price adjustment goes on constantly. Please note that bonds – even Government of Canada bonds can change in price significantly. In 1982, a long term Canada bond dropped about 50% in value due to the soaring interest rates at the time.

So indeed yes, you can lose your shirt on a presumably “safe” investment.

Although I am able to offer my clients Canada bonds and provincial bonds, please see me for specific advice regarding your current investment situation.


The case against bonds

When large American financial institutions started to fall one right after another last year, investors rushed into the safety, or perhaps certainty of U.S government bonds.

When all investors run to one side of the boat it is not without consequence. Panicked American investors had at the time, no need or desire for return on capital. Therefore, one did not care whether they made any interest on their government investment or not. Americans wanted return of capital rather than return on capital. If you can’t trust your bank then your next best bet is the issuer of your own currency – the U.S government. As a result, government bonds became popular very quickly.

For a short period of time, anxious buyers were willing to obtain a negative interest rate just for the privilege of buying a U.S treasury bill. Sell stocks to buy bonds was the clarion call.

Central bankers have lowered interest rates to just about zero and are holding them there in the hope that some of that cash on the sidelines will leak back into the economy in the form of additional consumer spending.

Unfortunately, the American consumer is tapped out. Deductible mortgage payments were an incentive to buy much larger and more expensive houses than Canadian homeowners.

Saddled by heavy mortgage and consumer debt, the American consumer is no mood to spend even more. They can’t as they have debt up to their eyeballs. They also have to worry about something else – the recession and skyrocketing unemployment rates.

Along with the monetary stimulus of ultra low interest rates, on the fiscal side, trillions of dollars have been pledged to both bail out and stimulate the U.S economy. However one has to ask the question.

Where are they going to get all that money?

Print bonds and sell them. Everyone loves bonds and government bonds are backed directly by the full faith of the American government.

Things today appear much better. Stock markets have made impressive gains since March 9th. New issues of even junk bonds are being gobbled up as investors are desperate for yield – any yield.

The American financial system is off life support and there are glimmers of hope for a U.S recovery perhaps as soon as this year – maybe even late summer or fall.

What if investors change their minds and don’t want to buy government bonds at zero percent interest?

Could it be that the stock markets are going to recover after all?

Remember everyone rushing to one side of the boat to buy bonds last year?  What if they rush back?

On August 31, 2009 the Recession Ends

Financial advisors have access to a number of various macroeconomic financial forecasts from a variety of investment managers and economists. A lot of material unfortunately, cannot be given directly to clients due to copyright or regulatory issues.

However, I have found a really great resource in the public domain that I would like to share with my readers.  It is the monthly economic and market comments by Dr. Martin Murenbeeld and his colleague, Bill Tharp. It can be found here.

Entirely readable and with lots of charts, these market summaries focuses on economic and financial trends in Canada and the US.  Highly recommended.

Of particular interest to us is Dr. Murenbeeld’s contention in a recent commentary that the stock market low was reached on March 9th and that the end of the U.S. recession will be this summer by August 31st!

So, make sure you pencil in that date on your calendar and remember you heard it here first.


For the technical “chartists” out there, June 2nd 2009 was a watershed moment as the S&P 500 Index crossed the 200 day moving average triggering a BUY signal.

As mentioned in a previous newsletter, the S&P 500 index is a broad based measure of the whole U.S. stock market so a BUY signal is a significant event. Before we pop the champagne corks we should also be aware that more than half of these BUY signals don’t turn out and the market sells off.  A much better signal for gauging momentum and trend is the 12 month simple moving average which hasn’t issued any confirmation signals yet. As an experiment, we’ll follow these two technical indicators in future newsletters and see what if anything, they can portend about the future.

UPDATE: June 22, 2009, the 200 day moving average has moved below the index level triggering a SELL signal. Two days later on June 24, 2009, the 200 day moving average has moved above the index level triggering a BUY signal.

The above BUY, SELL and then BUY signal is called a whipsaw - an inflection point(s) that results in a rapid reversal of BUY or SELL signals. These rapid reversals are not good as we are looking for long term momentum indicators. Therefore, the 200 day moving average fails our test.

Next, we try tracking a longer term moving average - the 12 month moving average which hasn't indicated any BUY signals.


Sometimes advisors take for granted that their clients are following the news about the recent stock market rally in the U.S. and Canada. If you are not glued to the TV screen watching the financial news networks, North American stock markets have indeed rocketed about 40% since March 9, 2009.

Most financial observers agree that the market will have to correct a bit after this significant rally, perhaps 10- 15% or so, before going back up. For the perennial pessimists, whose view is that the world is doomed to spiral down into darkness and chaos, now would be the time to exit entirely and graciously.

My current advice is to continue the dollar cost averaging strategy I had recommended, and to add new money on market pull backs. There is an enormous amount of cash idling on the sidelines – more so than the entire value of some stock indexes, and much of it is looking for a spot to land. Yields in bank accounts and chequing accounts are virtually zero and investors are interested in yield once again.


A reader has recently asked me about the rise in the Canadian dollar and its effect on international investments.

 Let’s use a house analogy to see how this works:

You bought a U.S. vacation property early this year for $100,000 when the Canadian dollar was $0.77. Unfortunately circumstances had changed and you had to sell the property only a few months after buying it. Fortunately, even after closing costs, you managed to sell the property at a higher price than what you bought it for. You sold the property at $105,000 U.S.. Certainly, a profit!

Back home in Canada when you reviewed your bank statements you realized that not only did you not make any money, you lost money! How come?

Here’s the math:

$100,000 US dollars cost about $1.30 ($0.77) when you made the purchase earlier this year.

At your Canadian bank you had to hand the teller $130,000 in Canadian dollars to obtain $100,000 US dollars to finance the purchase.

When you sold the U.S. property for $105,000 and took the U.S. cheque to your bank, the exchange rate was $1.08 (about $0.925) so you got back only $113,400 dollars.

Much to your chagrin, what you expected to be a $5,000 US dollar profit actually turned out to be a $16,600 loss.

So what happened?

The loss was caused by the appreciation of the Canadian dollar from $0.77 to $0.925 which in currency conversion terms meant that the US dollar lost value when it dropped from $1.30 to $1.08.

In local currency terms, the US investment clearly appreciated in value but the currency effect took away the gains. In other words, in U.S. dollars the investment made money – in Canadian dollars the investment lost money.

Do not forget that it works both ways. If the Canadian dollar had dropped in value rather than going up, the aforementioned Canadian investor could have additionally profited on the currency exchange.

The same applies to other U.S. investments such as stocks and bonds. If you own an investment in another country you will be affected by swings in currency – either to your benefit or to your detriment.

Canada’s dollar has been on a roller coaster ride of epic proportions, blasting through parity and peaking out at more than $1.10 US in late 2007 and then plunging down to about $0.77 earlier this year.

Canada’s sudden and unexpected return as a “hot” currency this spring has brought some disappointment to investors who can clearly see some improvements in the foreign stock markets yet their investments (based in U.S. dollars or other foreign currencies) are standing still or appreciating slowly due to unfavourable currency movements.

As I believe that the U.S. will soon perceive that a lower American dollar will be in their best economic interests, I am going to recommend not to increase exposure to U.S. dollar denominated investments at this time. To balance this view, one might expect that the U.S. could rebound very strongly as their recession ends hopefully, before summer’s end.

The Psychology of Investing
I hope everyone has received my last newsletter in January. In it, I hoped to brace everyone for the inevitable bad news to come.
Since then, our mutual fund statements have arrived and even though most of us were prepared for the bad news, reality hits home when we tear open our own statements.
For myself, I rarely look at mutual fund statements as I consider them to be a snapshot view at particular moments in time.
I know that stock markets go up and down in value - sometimes a little, sometimes a lot and one thing for sure is that I won't be cashing all of my investments and my entire net worth on the exact day of my retirement. Savings are to be accumulated over a long period of time - decades perhaps and divested over a long time. Often, the length of time we save and spend our savings is about equal. One thing for sure, we all wish that our savings will last longer than we do.
A warning is warranted though at this point in time and history. Some investors that have braved the steep market declines of last October and November with stoicism are now starting to waver as we enter the bear market psychology of exhaustion and demoralization.

In this part of the cycle, economic news will generally get worse before it gets better. Previous stock market lows may be tested and new lows may be set. The stomach gets butterflies. Perilous times indeed.
In this phase, we risk moving to "capitulation" which marks the bottom of a bear market and usually, the start of a new bull market. In the process of capitalization, we will start second guessing ourselves. Should I be abandoning ship, get out with a significant loss and invest what's left in a GIC at 4%? Well, we could do that but it will take 13 years to just get back to even. With interest rates plummeting, even a 4% GIC is hard to find these days.
Therefore we must ask ourselves the question: Will the stock market have the ability to recover in the next 13 or more years?

By Glenn Szlagowski – Financial Advisor
Kim Carter – Mutual Fund Salesperson

Market Commentary

As I write this in the last part of April 2009, stock markets had rallied for almost 6 weeks straight and were in a period of consolidation.

Will the market pull back once again before rallying?

While money managers wrestle with that question, the general mood out there is a bit more positive. We’ll call it a glimmer at the end of the tunnel as it seems that the U.S banking system is showing some signs of improvement.

On April 21, 2009, the Bank of Canada surprised many economic commentators by lowering rates another 0.25% and pledged to keep them at these all time historic lows for a whole year.    Rates can’t go down any lower as they are at the bottom.

This was a huge disappointment for interest rate watchers who thought that interest rates would start to go up in the coming months.

Anyone with an older variable rate mortgage should be paying less than 2.0% now.  It is important to realize that a historically low interest rate environment is a huge stimulus for the real estate industry and banking industries.
As loans become “cheap” consumers generally respond by spending.  

A 2% mortgage on a house looks definitely more attractive than the + 22% mortgages of the early 1980’s.
Contrary to popular belief, banks absolutely love low rather than high interest rates.

It is a huge win for them as they can widen the spread between deposit and lending rates. Canadian banks are set to profit handsomely as the economy recovers.
For you technical chartists out there, you may be surprised to know some mutual funds have broken above their 200 day moving average. These chart technicians often note that a break out above the 200 day moving averaging could be a possible buy signal
Before we get too excited about this it is important to note that these “buy signals” generate many false positives as the markets may unexpectedly suddenly reverse course resulting in a “whipsaw”.
Bear market rally or fizzle?

In my last newsletter we talked about the importance of investor psychology.
For those investors who thought the glass was not only half empty, but entirely empty, even the most pessimistic of investors had to do a double take when they saw the markets roar back to life with a solid +25 % gain that started around March 10th.

Whether the gain will prove to be a temporary rally or the start of a new bull market, only the historians will know for sure. The consensus view of many observers is that the rally will fizzle and the market won’t start a sustained rally until later this year.
The rally was remarkable not because of its magnitude, it was remarkable how investors suddenly became far more optimistic in just a few trading days. From the depths of despair to the heights of euphoria in just a week or so – a very neat study of the human psyche indeed.

Dollar Cost Averaging (DCA)

Although everyone would like to sell at the very highest price and buy at the absolutely lowest price, no one I know has that ability to forecast the future with any repeatable accuracy.

If we can’t predict the future reliably, which strategy could be used to hasten the recovery of our investment portfolios?

Although I touched upon the general mechanics of Dollar Cost Averaging in the past, I thought it would be worthwhile to review how this program works.

Let’s say at the beginning of the decade you had invested $10,000. In the middle of the decade, the stock market falls apart and your portfolio is now worth only one half of that, say $5,000. Not much to show for five years worth of investing is it?

[Everyone nods their head in agreement]

Should you sell what you’ve got left and put the $5,000 in the bank at close to 0.0% interest?

We could do that although if the market stays about the same 5 years from now, you are still down $5,000.  However, while we’re still deciding what to do, you’ve received an unexpected inheritance from your great aunt and you now have $12,000 to invest. Great.

Even worse, your savings plan has been accumulating cash for some time and you have to make a decision what to do with your hoard of cash.

You decide to dip a careful toe back into the markets…

Your advisor suggests something called dollar cost averaging.

You decide that you are going to tentatively invest $1,000 per month over the next year or so starting right now.

Here are a few possible future scenarios.

A.    The market goes straight up after your first half-dozen deposits. Drat! Should have invested the whole amount but at least you can tell your friends that you were in buying first while they were still mulling over last year’s statements.

B.    The market drops a bit more and then goes nowhere and is just zigzagging sideways. You are buying more shares at the dips and fewer shares at the peaks. Surprise! Due to the science called mathematics, chances are that you made a profit. Modest yes, but a profit nonetheless.

C.    The whole stock market goes to zero and stays there permanently. Hmm… should have bought those 100 acres in the country when money was still worth something. Not looking forward to rooting around for wild edibles in January. Where do I buy seeds and with what?

Let’s say that option “C” has a rather low probability and that “A” or “B” is a more likely scenario.

One of the DCA’s more important benefits is psychological. Investing a large sum and then seeing the market drop significantly immediately right after is painful. The behavioral experts say it is about twice a painful as a similar gain.

From the human perspective, a $100 loss is much more painful than say the satisfaction of making a profit of $100. Why? It is well beyond the scope of this article but suffice to say, people are built funny.

Dollar Cost Averaging gives us the opportunity to get into or back into the market gradually, over a period of time of your choosing. It can outperform in sideways moving markets, “V” shaped markets or “U” shaped markets. As mentioned above in Option “A” it will underperform slightly in steeply rising markets.

DCA should be seriously considered as a way of investing in the markets as we try to find the bottom of the current stock market cycle and wait for the inevitable recovery to follow.

Web site launch

I started a financial web site shortly after opening my first internet account in 1996.

Soon I had almost 200 pages of all kinds of financial information. It took a while before I realized that I was trying to compete with CNN but did not have the resources to keep the content fresh and current. I had created a time sucking monster. I had to decide to either be a financial advisor or be a full-time webmaster.

The web site had to go.

Early this decade, I decided to replace the web site with email and then e-newsletters.  This way I could send the latest news and views of the financial world directly to my client’s Inbox.  This system has worked very well over the years and I will continue the service of keeping my clients informed and up to date.

The definition of email usually means read it and delete it so I thought I would resurrect the idea of a permanent web site once again and not make the same over eager mistakes I made in those crazy early days of the World Wide Web.

My new web site has just been approved by our Head office. Financial Advisors are no longer allowed to put anything they want “out there” on the web without a complete and formal review with respect to content and regulation.

The new web site will not only keep copies of my newsletters but going forward, it will be used as a investor resource center and will cover topics such as GICs, mutual funds, estates and wills, taxation issues, retirement planning, market views,  etc.  My new web site address is Please bookmark it for future reference.

Lagging and leading indicators

Lagging and leading economic indicators. Economists and financial people like to use these terms. Are they useful?

Although we can use conventional measures like durable goods orders, credit spreads, unemployment rates, house prices and stock prices as indicators of future economic growth or contraction, economists, will tell you that predicting the future economy is like driving using only your rear view mirror.

Watching what the latest unemployment rate was on the 6 o’clock news will not help you judge when a recession will continue or not because unemployment will generally peak after the recession has ended. Therefore, the unemployment rate is considered to be a lagging indicator as it lags behind the economy.

[Click on the “lagging” hyperlink above in order to see this phenomenon in chart form. Note that the vertical grey bars are recessions.]

The stock market is considered a leading indicator as the stock market usually recovers before the economy does.

[Editor’s note: there is one recent exception to the above rule. In 2001, the U.S (but not Canada), slipped into a short recession following the 9/11 crisis. Although the economy recovered, the stock market didn’t. The stock market already in decline kept going down for a total of 30.5 months before resuming its upward climb. The stock market decline of 2000 - 2002 was remarkable in that it lasted just a few months shy of the entire stock market decline of the Great Depression. The current stock market decline in the U.S is now over 18 months old.]

If someone could invent a leading indicator to the leading indicator stock market, they would be very wealthy indeed. However what we know is what we have experienced in the past. In 1981 with the economy in a nosedive and interest rates +20% we all should have and could have locked in 15% a year for 20 years. Very few investors did that and most rode the interest rates up and then rode it all the way down by keeping their money in daily interest accounts or in very short term deposits.

A leading indicator I often look for is when investors start to ignore dismal economic news and start to look farther down the road to better corporate earnings.

Having a positive attitude influences everything we do so I’ve found a unique chart that really is the big picture and I think is a positive view of the stock market since 1871 (the S&P Composite Index1 is used here). Note that stock markets spend most of the time going up and the upswings are far greater than the corrections.  

Interest rate watch

Not all recessions are alike. For instance, the 1981-82 recession was said to have been purposely caused by our very own government. At the time, inflation was out of control and the government and their central bankers just kept yanking up interest rates until the economy collapsed. Problem solved – no more inflation but massive unemployment and an economy in a vertical nose dive. Necessary “harsh medicine” the government of the day said.

In 2009, the economy is in recession once again with perhaps real estate as the prime culprit this time around. Today, the interest rate environment is very different. We are not faced with 22.75% prime rates like in 1982 but a 2.25% prime rate in 2009.

Low interest rates are great for borrowers but what about us savers? What can we do about low interest rates for GICs and term deposits? Not much as we don’t get to set the rates! We can however, do a bit of careful shopping and try to find much better interest rates.

We survey dozens of banks, trust companies and credit unions in order to find the best interest rates for my clients.

For instance: Most of the big banks are advertising interest rates of 0.40% for a 1 year GIC.
Not very exciting at all.

With a bit of sleuthing, I can find another CDIC (Canadian Deposit Insurance Corporation) bank offering 2.00% for the same term2, some 5 times more interest. Yes, that is hard to believe, but you can earn 500% more interest by shopping around. And we do all the shopping for you!

Please give me a call if you are either buying or renewing a GIC with your current bank and I can give you a competitive quote.            

Fund radar scope

AIC Global Focused Fund

This fund is an international equity fund, meaning that it is invested 100% in stocks around the world and is up almost 10% year-to-date. It bottomed at around $7.00 per unit in early March 2009 and is trading in the high $8 range as of April 24th 2009. It has recently broken through its 200 day moving average.
The fund’s slogan of “safe and cheap” refers to its discipline of acquiring and holding stocks of companies whose liquidation values far exceed the value of the stock net of all liabilities.
This fund’s sole focus on global stocks places it in a higher risk category and could be suitable to those investors with an appropriate risk profile.

Bissett Dividend Income Fund

Closer to home, this Bissett fund is more oriented to Canada and focuses more on Canadian common stocks that pay dividends.  About 20% of the fund is invested in bonds to help smooth out the fluctuations. The fund’s mandate does allow for foreign equity and fixed income investments.
The fund’s focus on dividend paying stocks and bonds places it closer to a moderate risk category and again, could be suitable to investors with an appropriate risk profile. For both of these funds, please check with me first in order to determine if they will fit in with your existing portfolio.

Appointment reminder

Despite encouragements to do so, a few of my clients are not coming in for their regular financial checkups. With recent market volatility it is even more important to contact your advisor and do a thorough review. If your salary increased or decreased significantly, you changed jobs, retired, marital status has changed, your risk tolerance changed – all of these are material changes that can impact your investment objectives.  Even if there were no changes, we should be reviewing your account on a regular basis – at least once a year. Please block out an hour or so of your time to book an office appointment. If a daytime appointment is just not possible, we can also do evening or weekend appointments. Please call Kim Carter or myself at 519.744.3020 to book an appointment.

Contact us:
Glenn Szlagowski
Financial Advisor
Kim Carter
Sales Assistant


1 The U.S has got us beat for stock market data. They have a lot more of it and can go back well into the 19th century.

2 GIC rate as of April 30, 2009

This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please make sure to see me for individual financial advice based on your personal circumstances. Commissions, trailing commissions, management fees and expenses, may all be associated with mutual fund investments.  Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.  Please read the prospectus and consult your Assante Advisor before investing.

Links to other websites are for convenience only, and are independent from Assante and therefore Assante has no control over the content of a linked website.                                                                                                                                                   

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