I’ve been doing some minor work analyzing low-risk cash parking options in both USD and CAD currency. My underlying assumption is we will see a couple more (quarter point) rate hikes in 2019 if the economy doesn’t crash and we will see nothing happening on rates if the economy does decide to slow down. If interest rates are projected to be less than market expectations, it would make sense to buy a constant-maturity ETF (in particular, NYSE: SHY looks attractive – YTM of 2.85%, duration 1.86 yrs, MER of 0.15%). The following option are fixed-maturity ETFs, which remove most of the duration risk (although in the case of SHY, a duration of 1.86 yrs is not exactly gambling on the direction of interest rates either).
Canadian currency: TSX: RQG – portfolio of high-grade corporate debt, YTM 2.67%, duration about 9 months, MER 0.28%, maturity November 2019.
US currency: Nasdaq: IBDK – portfolio of high-grade corporate debt, YTM 3.05%, duration 0.56 yrs, MER 0.10%, maturity December 15, 2019
Nasdaq: BSCJ – portfolio of high-grade corporate debt, YTM 3.05%, duration 0.58 yrs, MER 0.10%, maturity December 31, 2019
I would deem these ETFs to be relatively low risk – even if there was a meltdown in the corporate bond market. The US ETFs are trading above NAV but market fluctuations should render an execution at par or even a mild discount.
I would, however, avoid the high-yield corporate bond market. Not only will rising risk-free rates damage yields in this sector, but the ultimate risk of investing in high-yield is defaults and it has been quite some time that we have seen the entire junk bond market get hit.
It is also reasonable to construct your own ETF by purchasing the underlying bonds directly. As an example, Shaw and Rogers October/November 2019 debt is roughly 2.7% yield to maturity. All of the ETF names above trade in an efficient and liquid market and it is a lot easier to just trade them instead of the underlying bonds.
Thanks for those Sacha.
Please note I mistakenly quoted 4.14% for the YTM of the RQG ETF. This was the current yield of the portfolio and not the YTM, which is 2.67% presently (otherwise it would have been the world’s greatest management ever known to mankind to generate 414bps out of an BBB to A type bond portfolio!).
Sacha…if your going to lock up USD for a year, why not Tangerine USD 3% 1 yr GIC?
1-year treasury bond is 2.7% right now, so if liquidity is of zero concern, receiving a 30 basis point yield for locking it up for a year? Depends on your situation. I wouldn’t do it myself because I like having the “sell” button in front of me, plus the cost of breaking the GIC early (e.g. redeeming without interest) becomes more expensive as the maturity date gets closer. 3% is pretty decent, all things considered, if getting access to that capital in a year is not a concern.
Thanks for your thoughts Sacha