B5

David Friend
THE CANADIAN PRESS

Stumble Upon

del.icio.us

Digg

Facebook

Print

Email

Speak Up

TORONTO - Stock exchanges are being ravaged by uncertainty as the credit crisis continues to weigh heavily on the minds of investors, leading many to ponder alternate places to put their money including the often misunderstood and sometimes underappreciated bond market.

But it isn't just the average investor who doesn't "get" the bond market - even some of the professionals aren't paying as much attention to it as they should, suggests one observer.

"Most of the advisers I meet really don't understand the bond market - and some of them are really open about it," said Randy LeClair, portfolio manager at AIC Ltd.

"A basic Canadian domestic bond fund is not all that sexy - it doesn't have the sex appeal."

In basic terms, a bond is a specific amount of money lent to a borrower with an agreed rate of interest paid for a set period of time.

Then, after the time is up, the lender gets the money back and can either lend it again or keep it.

Selling bonds tends to be more difficult, he suggests, partly because Canadians have a relatively cushy relationship with their local bank.

"People trust the banks and they're in love with their GICs," LeClair said.

"We believe that once people understand what (bonds are) and what they're getting they'll be very happy because it's a lot more flexible than a GIC."

Bonds might not have the upfront simplicity of traditionally safe investments, but the existing market climate makes them look more appealing.

"Bonds are the one asset class that do wonderfully well when the world is fairly grim," said Eric Lascelles, a chief strategist at TD Securities.

"At this point in time when, as we think, the world is not looking all that bright, it makes sense to be long in bonds and take advantage of the negative things that are happening," said Lascelles.

"The beauty of bonds is that they're the precise opposite of the stock market."

"If you buy stocks and the economy does well, you do great, but you do horribly if the economy does poorly. When you buy bonds you're basically hedging your exposure to that because bonds do well in the exact opposite situation."

For bonds, the yield calculations show the return on investment as a percentage of its price.

If a bond is bought at a five per cent yield, the buyer is guaranteed to get that rate of return until the date when the bond matures.

"Where things get a little bit complicated is if the prevailing interest rate in the market changes over those five years. Other people may be willing to pay you more of less for that bond" in those circumstances, said Lascelles.

"If you get a five per cent bond and the prevailing interest rate falls to four per cent, you still get your five per cent. But other people will say 'I'd be willing to pay more than the normal $100 for (your) bond because it'll get me a rate that's higher than I can get elsewhere.'"

But not all bonds are created equally, and investors need to consider how much risk they want to take before deciding whether to put their money into corporate bonds or considerably safer government bonds.

"If you're truly worried about the world, government bonds are the place to be. They're the safest place simply because governments as a general rule don't go under," Lascelles said.

"The downside is that you're not going to get a great rate of return because the uncertainty is so low."

Investing in the wrong corporate bond can increase the risk if the company happens to go under, meaning that you might not get your money back.

However, a company is usually obligated to pay back its bondholders before its shareholders, which decreases some of the risk when compared to stocks in an uncertain economy.

Buying a bond isn't all that difficult because its part of the over-the-counter market and fairly seamless.

"You can still go to your discount broker and purchase that bond as if it were a stock and it's no more complicated and no more costly," Lascelles said.