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Higher yielding U.S. bonds more attractive for Canadian investors

by Wayne Cheveldayoff, 2005-03-24

If you are looking for yield, it may be worthwhile to shop south of the border where bond yields are generally higher now.

The yield to maturity on a two-year U.S. treasury bond was 3.67 per cent recently on the same day that the two-year Government of Canada bond yield was only 2.97 per cent.

The gap was almost as wide for five-year government bonds – 4.12 per cent versus 3.68 per cent – but narrowed somewhat for the 10-year term, where the U.S. yield was 4.46 per cent and the Canadian yield was 4.33 per cent.

The decision to invest in foreign-currency bonds shouldn’t be based only on yield. The value of the Canadian dollar has to be considered.

If the Canadian dollar climbs dramatically and stays there until the bond is sold or matures, any gain on yield could be more than offset by a loss on the currency exchange.

So, investing in bonds denominated in foreign currencies requires one to take a view on the Canadian dollar. Many Canadian investors haven’t had to forecast the currency for this purpose because they have typically kept fixed income investments in tax-sheltered registered plans like RRSPs and RRIFs and have stayed with Canadian bonds due to the foreign-content limit. The space available under the limit could be used for foreign bond investments, but instead that space normally has been allocated for foreign stocks.

Another factor that has encouraged bond investors to stay on this side of the border was the higher yield available here until recently. However, with the Bank of Canada holding back on rate increases since last fall while the Federal Reserve steadily boosted its rate, U.S. yields have been pushed above their Canadian counterparts.

Here are some examples taken recently from the bond-offering list of a bank-owned discount brokerage. The commissions are embedded into the prices charged, so the yields are effectively what investors could earn if the bonds are held to maturity.

Province of Ontario bonds denominated in U.S. dollars (known as U.S.-pay bonds), with a coupon of 5.125 per cent and maturing July 17, 2012, were yielding 4.44 per cent. In comparison, the Canadian-pay Ontario 5.375 per cent of December 2, 2012 had a slightly lower yield of 4.375 per cent.

The gap for Quebec bonds was wider. U.S.-pay Quebec 6.125 per cent of January 22, 2011 were yielding 4.489 per cent, whereas the similar-term, Canadian-pay Quebec Hydro 6.5 per cent of February 15, 2011 were yielding only 4.127 per cent. The Quebec Hydro bonds are guaranteed by the Province of Quebec.

Among the corporate offerings were some unusual opportunities to get a higher yield for a higher-rated U.S. bond. For example, the U.S.-pay General Electric 5.875 per cent of February 15, 2012, rated AAA, were yielding 4.61 per cent, whereas the Canadian-pay Bell Canada 6.25 per cent of April 12, 2012, rated several notches lower at A(high), yielded only 4.54 per cent. Normally, a triple-A-rated bond would have a lower yield reflecting a lower risk than an A(high) bond.

Looking at a pair of bonds with the same AA(low) credit rating, the U.S.-pay Wells Fargo 4.95 per cent of October 16, 2013 were yielding 4.76 per cent, while the Canadian-pay CIBC 4.95 per cent of January 23, 2014 yielded only 4.66 per cent.

The federal government proposed in the budget to remove the foreign content limit, so assuming it will be approved by Parliament, the door has effectively been thrown wide open to foreign investing of all kinds – bonds included.

However, one’s timing will be critical in making it worthwhile.

While an extra one or two-tenths of a percentage point of yield may be too little at this time given the risk that the Canadian dollar may go higher, the situation will not remain static and bears watching.

The higher the Canadian dollar goes, the lower will be the risk that it will go even higher.
Any spike upward in the Canadian dollar would be a good opportunity for Canadian investors to do some cross-border shopping.

Wayne Cheveldayoff is a former investment advisor and professional financial planner. He is currently specializing in financial communications and investor relations at Wertheim + Co. in Toronto. His columns are archived at and he can be contacted at

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©2005 Wayne Cheveldayoff