Government Bonds

by Michael Zienchuk

Manager, Wealth Strategies Group

During periods of heightened volatility in equity markets many investors turn to bonds or debentures, especially government bonds, for safety. First of all, let’s consider some basic information about bonds and government bonds in particular. A bond is a debt security whose issuer (the borrower) agrees to repay the money given to them by the holders (the lenders) of the bond. Most bonds bear interest (the coupon) and all bonds need to be repaid in full at a maturity date. The coupon is usually paid at fixed intervals (monthly, semiannual or annual). Most bonds are traded on financial markets.

One major component impacting the yield of a bond is its credit risk (issuer or borrower risk). Government bonds are generally considered the least risky. In some cases, government bonds are considered risk-free because governments have the ability to print money or raise taxes to provide the capital to redeem their outstanding obligations, including their outstanding bonds. That being said, historically various governments have defaulted on their bonds. Government bonds can be denominated in the country's own currency (in which case they are sold internally) and in other currencies (sold abroad). Those government bonds, which are issued in foreign currencies, are called external bonds, Eurobonds or sovereign bonds.

When Canadians hear about government bonds, Canada Savings Bonds (CSBs) often spring to mind. CSBs are investment instruments offered by the Government of Canada to the public in October-December of every year. At the same time, CSBs are not really bonds, they are debentures. The difference between bonds and debentures is that while bonds are secured by specific assets, debentures are unsecured. Nevertheless, CSBs are cashable at any time and have a guaranteed minimum interest rate. In April 2014, CSBs offered up to 1.40% in annual interest payments.

Canadian federal government debentures or benchmark bonds include bonds which have 2-30 years to maturity (maturing between 2016 and 2045). These bonds are available at auctions to institutional investors who act as market makers. Depending on maturity date, government bond yields are currently in the range 1.00%-3.00% (see the table).

Canadian government and quasi-government bond yields

Bond	Maturity	Yield, %
Federal Government
Can. Govt 2 Year	2016-May-01	1.06
Can. Govt 5 Year	2019-Mar-01	1.59
Can. Govt 10 Year	2024-Jun-01	2.33
Can. Govt 20 Year	2037-Jun-01	2.82
Can. Govt 30 Year	2045-Dec-01	2.85
Provincial
Ontario Prov	2017-Mar-08	1.41
Ontario Prov	2018-Jun-02	1.90
Fin Quebec	2019-Dec-01	2.24
Ontario Prov	2023-Jun-02	3.01
New Brunswick	2041-Jun-03	3.88
Agency, municipal
Montreal	2016-Feb-17	1.43
Ontario Electr Fin Corp	2016-Apr-01	1.35
Ontario Hydro	2017-Apr-01	1.52
NS Power	2019-Feb-26	2.47

Canadian provincial bonds with comparable maturity dates are trading at lower prices or have higher coupons, and hence have higher yields than federal ones, in the range of 1.4%-3.9%. This is explained by the fact that the federal government is generally considered more creditworthy because it has more economic and financial levers to use in meeting its obligations.

Down the food chain, provincial agency and municipal bonds usually have somewhat higher yields. Some agency and municipal bonds may sometimes trade at lower yields than provincial and even federal government bonds because bond yields reflect the level of re-payability which the market assigns to a particular borrower and their outstanding obligations.

Michael Zienchuk, MBA, CIM

Investment Advisor, Credential Securities Inc.

Manager, Wealth Strategies Group

Ukrainian Credit Union

416-763-5575 x204

mzienchuk@ukrainiancu.com

www.ukrainiancu.com

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