Gyroscopic Investing

Hi,

My bank brokerage firm (CIBC investors edge) sell government bonds. Is it supposed to be secondary market? There is no fee to buy and sell bonds. I guess the fee is already built into pricing. Am I getting ripped off here as they normally do ?

It seems simple to buy bonds from them but a lot of people use bond ETF. I guess in US it is TLT. Craigr uses it.

Is there an advantage for a newbie like me to buy an ETF such as ZFL (BMO long federal bonds: I'm in Canada) instead of buying a 30yr LB from a brokerage. The bonds in the mix are all government bonds whose durations are 15-30+ years.
Thanks so much.

I can only speak in broad terms about government bonds since I'm strictly a US investor.  Many brokerages offer free government bond trades as a sort of courtesy (or loss leader?)  I use Fidelity in this way for trading US Treasury securities.

I'd recommend checking the prices you see on your brokerage website versus those of a third party to get comfortable that the pricing looks "clean".  Examine the bid-ask spreads and make sure that they are tight.  (They're very, very tight on US Treasury bonds, for example.)

Finally, examine the expense ratio of the ZFL fund you are interested in and see what kind of a deal you're getting.  TLT has an expense ratio of 0.15%, which is very reasonable.  Still, if I can hold the bonds myself it's an expense that I generally consider unnecessary and choose to forego when possible.  I wouldn't want to pay a very high expense ratio just for someone to sit on some government bonds for me, so do give that a look.

The main advantages of the ETFs are the ease of use and their availability from brokerages that charge fees for government bond trades.  I use TLT in retirement accounts that do not offer free Treasury trades.

I was told by my brokerage that individual bonds are generally less liquid than bonds ETF. ZFL (equivalent of TLT in Canada) is small in volume. For example, there was no trade until later in the afternoon.

metta2006 wrote: I was told by my brokerage that individual bonds are generally less liquid than bonds ETF. ZFL (equivalent of TLT in Canada) is small in volume. For example, there was no trade until later in the afternoon.

You're only going to be buying or selling once every few years, so I wouldn't worry about this at all.

metta2006 wrote: I was told by my brokerage that individual bonds are generally less liquid than bonds ETF. ZFL (equivalent of TLT in Canada) is small in volume. For example, there was no trade until later in the afternoon.

I can't possibly imagine that Canadian bonds are less liquid than the ETF that trades them!

Just buy the bonds directly. This is not only the cheapest way to own them (no annual expense ratio), but it eliminates manager risk because you don't need to worry about a bond fund making decisions for you.

Sorry for such a basic question.. But buying directly from whom? Buying from any big bank discount brokerage, such as Td waterhouse would be ok?
Thanks.

metta2006 wrote: Sorry for such a basic question.. But buying directly from whom? Buying from any big bank discount brokerage, such as Td waterhouse would be ok?
Thanks.

Most brokerages have a bond desk that can help you buy bonds. That is a perfectly fine way to go about buying and holding them. They just sit in your account quietly paying you interest.

My rookie PP question for the day:

In a taxable account, wouldn't TLT be much more tax efficient than buying LT treasuries directly since you'd never have to sell bonds except for rebalancing events (vs rolling your ladder manually as they reach 20 years maturity)?

Just thinking about balancing risk vs return...

Tyler wrote: My rookie PP question for the day:

In a taxable account, wouldn't TLT be much more tax efficient than buying LT treasuries directly since you'd never have to sell bonds except for rebalancing events (vs rolling your ladder manually as they reach 20 years maturity)?

Just thinking about balancing risk vs return...

My bet is no.  TLT has to sell bonds to maintain its average long term maturity, just as you would.

I'm not sure, though.



 

I don't think that answer is correct.  Sorry to dredge up an old post, but I have the exact same newbie question.  TLT has never distributed a capital gain, and has a 28-year average maturity, according to the latest factsheet.  ETFs apparently have some tax advantages (the exact workings of which I don't understand) built into the structure of creating and redeeming blocks of shares. 

Assume you are in distribution mode, do not have tax-sheltered space for bonds, and need to turn over the entire holding to get back to 30-year maturity.  It would be a big hit with the cap gains of the last few years.  Of course the next time could just as easily generate a loss, but I think I would rather pay the .15% to TLT and leave cap gains out of the equation.

I am missing something there?

bswift wrote: I don't think that answer is correct.  Sorry to dredge up an old post, but I have the exact same newbie question.  TLT has never distributed a capital gain, and has a 28-year average maturity, according to the latest factsheet.  ETFs apparently have some tax advantages (the exact workings of which I don't understand) built into the structure of creating and redeeming blocks of shares. 

Assume you are in distribution mode, do not have tax-sheltered space for bonds, and need to turn over the entire holding to get back to 30-year maturity.  It would be a big hit with the cap gains of the last few years.  Of course the next time could just as easily generate a loss, but I think I would rather pay the .15% to TLT and leave cap gains out of the equation.

I am missing something there?

Under the HB PP recipe, you will mechanically buy and sell long term treasury bonds once every ten years based upon the 30 year bond only have 20 years left to maturity.

During that ten year period, however, you will have experienced, on average, 3-4 rebalancing events.  During each rebalancing event you will either be buying or selling long term treasuries.  If you are selling them, you will be selling out of bonds that would otherwise be nearing the 20 year-to-maturity mark (thus reducing the number of bonds that would otherwise need to be sold when they reached 20 years until maturity).  If you are buying them, then you will be lengthening the average duration of your overall long term treasury holdings.

At the end of 10 years from the initial setup date of your PP, you will perhaps have some long term treasury bonds to sell, but you will only be concerned about this if there are unrealized capital gains in those bonds.

Overall, it seems like between the natural extension of the average maturity as a result of rebalancing and the potential for long term bonds to not even have any unrealized capital gains to be concerned about, this isn't an issue that is worth preferring TLT over individual bonds.

Since most investors have some space in tax deferred accounts which would make this issue moot for a portion of the LT treasury holdings, that makes me think that this issue would be even less problematic.

I would say maybe try the first 10 years of your PP experience with HB's recommended approach and then try the second 10 years with a TLT approach and at the end of 20 years compare the two approaches and see which one you like better.

At a minimum, if you set up your PP today, it will be 10 years (at the earliest) before this is something you will need to worry about, assuming it would ever actually present a tax issue.

Thanks for the thoughtful and helpful reply.  I have maybe an odd situation in that I will get a lump-sum payout, which I then plan to start as a PP for retirement withdrawals.  My other option would be to buy an annuity.  But with the lump sum I would have all of my bonds, except for rebalancing effects like you mention, to roll back to 30 years at the same time. 

I'll ask a separate post about the 20 years thing.

You could also go 50% individual bonds and 50% TLT in your LT treasury holdings.