Q&A With Gordon Pape: The Future of Bond Funds

Financial expert Gordon Pape offers up some advice for a reader wondering if the hit he’s taken on a longer maturity bond fund is just the beginning of his losses.

 

Q – I am trying to understand the medium to longer term potential for additional losses in a longer maturity bond fund (XCB) in a potential rising interest rate environment. I have already taken a $1 per unit hit so far and would like to know if more losses are in store as we (potentially) move into an increasing interest rate period over the longer term. Should I crystalize losses now to avoid more in the future? Thank you so much! – Betty M.

A – XCB is the trading symbol for the iShares Canadian Corporate Bond Index ETF. It invests in a portfolio of corporate bonds, of which 14.9 per cent are long-term issues, with a maturity of 20+ years. Another 12.2 per cent have maturities between 10 and 20 years.

Long-term bonds are the most vulnerable in a rising interest rate environment, so it should come as no surprise that this fund is down 3.77 per cent year to date (May 20). The Bank of Canada appears to be more concerned about inflation and there is a growing expectation it may raise its key rate later this year. That would imply more losses for funds like XCB.

If you want to reduce your bond fund risk, switch to a short-term fund like the iShares Core Canadian Short Term Bond Index ETF (TSX: XSB). It is also down for the year, but only by 0.46 per cent. – G.P.

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