Yield + Weak USD are bullish for US Bond ETFs

Posted on: January 27, 2011 in: Uncategorized with 0 comments

Within our bond allocation, we recently shifted some weight from XLB, a Canadian ETF to LQD, a US ETF. Click here for the one-page PDF.
XLB holds various Canadian government bonds and has an average term of about 22 years and a yield of 4.5%. LQD holds US corporate bonds and has an average term of about 12 years and a yield of 4.9%.
We believe Canada is further along than the US in its economic recovery. It is likely the Bank of Canada will begin raising interest rates before the Federal Reserve. Bond ETFs are hurt by rate increases. The longer we can postpone, the better. The BoC could raise by this summer. The Fed raise is unlikely before 2012.
Also, with the Loonie at par, there is little currency risk. In fact, we believe the USD will likely strengthen versus the CAD. Stimulus spending has devalued the USD but the current round ends in June. Tighter, or at least “less loose”, money supply and improving fundamentals will strengthen the USD after that.
LQD holds quality US corporate issuers in a wide range of maturities. It has a better yield and lower fees than Canadian bond ETFs. Total return in 2010 was about 9.1%. A good yield and possible currency gains should provide decent returns. We expect to hold it through 2011 but will sell as US conditions improve.

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