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How to Invest in Bonds in Canada
How to invest in bonds in Canada

How to invest in bonds in Canada

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Bridget Casey

By Bridget Casey

🗓️

Updated: November 25, 2024

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Bonds are essential to a diverse investment portfolio.

They help protect your portfolio against stock market volatility while providing a regular and reliable source of passive income. Best of all, it’s now easier than ever to buy bonds in Canada!

I personally keep 20% to 25% of my entire investment portfolio in bond ETFs.

These funds are some of my favourite holdings in my portfolio because they pay dividends monthly, which provides a reliable cashflow I can use to buy other investments. I even keep my core bond funds set on DRIPs (Dividend Reinvestment Plan), so I’m always increasing my position in these ETFs.

As a result, my passive income grows every single month. I think bonds are a must-have for any portfolio, and anyone who wants to start investing should allocate a percentage of their investment portfolio to this asset class.

What is a bond? What are bonds?

Bonds, like stocks, are issued by corporations in order to raise capital for business operations. Bonds, however, are much different than stocks in how they work and what they provide for the investor.

When investing in stocks, you’re purchasing shares in a business and becoming a part-owner of that corporation. That entitles you to profit sharing and often voting rights to have a say in how the business is run. With bonds, you are lending a business money. This entitles you to interest payments plus a guaranteed return of your capital when the term of the loan ends. Unlike with stocks, you don’t receive any profit sharing in the company or voting rights as a bondholder.

Related: How to buy stocks

The best way to understand what bonds are and how they work is to think of them as a loan. You are loaning a company money that they will pay back by a certain date, with interest. To put it simply, bonds are not that different than student loans or a car loan, except you’re the lender instead of the borrower!

Related: Investing for beginners

Where to buy bonds in Canada

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Why do I need bonds in my portfolio?

Bonds are essential to have in your portfolio to balance your investment allocations, as well as provide a source of passive income.

Bonds typically move in the opposite direction of stocks. So when the stock market goes down, the prices of bonds tend to increase, and vice versa. By having a mix of both bonds and stocks in your investment portfolio, you can reduce the amount of volatility you experience as an investor.

Bonds also provide an excellent source of passive income for your portfolio. Because bonds guarantee a rate of return on your investment paid on a fixed schedule, they’re perfect for investors who want a reliable source of passive income. Bond ETFs tend to make their interest payments monthly, which means you’re paid more frequently than stocks which typically pay on a quarterly schedule. This is the reason many people tend to adjust their portfolio to have more bonds as they near retirement.

Bond: What is it? Key terms you need to know

When it comes to understanding bonds and adding them to your investment portfolio, there are some key investment terms you need to understand:

  • Term: the length of time from the date the bond is issued to its maturity date. In other words, the term of the loan! This can range from 1 to 20 years.
  • Maturity date: the date at which the bond term ends, and your investment capital is returned.
  • Coupon rate: the interest rate paid to the bondholder per year. A bond with a 3% coupon pays 3% per year. Payments are typically scheduled monthly.
  • Credit rating: Indicates the issuer’s ability to repay (AAA is the highest).
  • Current yield: A measure of the bond's return, calculated as the annual interest divided by the bond's current price.

How to buy bonds in Canada

There are two ways to buy Canadian bonds: you can purchase a bond fund through your brokerage account, or you can purchase bonds directly from the issuing government or corporation by way of a financial broker.

Related: Best trading platforms in Canada

  • Step 1: Understand the basics of bonds

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    A bond is essentially a loan you give to a government or corporation, which pays you interest over time and returns the principal when the bond matures.

    Types of bonds include:

    Government bonds: Issued by federal or provincial governments (e.g., Canada Savings Bonds).

    Corporate bonds: Issued by companies to raise capital.

    Municipal bonds: Issued by local governments or municipalities

  • Step 2: Determine your investment goals

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    Are you looking for steady income? Do you want to preserve your capital with minimal risk? How long can you hold the bond (short-term vs. long-term)?

    Consider your risk tolerance, as corporate bonds often yield higher returns but come with more risk compared to government bonds.

  • Step 3: Decide where to buy bonds

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    Direct from the government: Websites like Buyandsell.gc.ca allow Canadians to purchase government bonds directly.

    Through brokers or online platforms: Use platforms like Questrade, RBC Direct Investing, or TD Direct Investing to access a broader range of bonds.

    Bond funds or ETFs: Invest in diversified bond funds or exchange-traded funds if you prefer a hands-off approach.

  • Step 4: Open an investment account

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    If you don’t already have one, open an account with a brokerage platform.

    Registered accounts: Tax-advantaged accounts like RRSPs or TFSAs.

    Non-registered accounts: For more flexibility, but without tax benefits.

  • Step 5: Place your order

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    Once you've chosen a bond:

    Market order: Buys the bond at the current market price.

    Limit order: Buys the bond only if it reaches your specified price.

    Specify the number of bonds you wish to buy (each typically costs $1,000 per unit).

  • Step 6: Monitor your bonds

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    Regularly review your bond portfolio to:

    Track interest payments (usually semi-annually or annually).

    Reassess your portfolio as market conditions change.

    Decide whether to hold the bond until maturity or sell it on the secondary market.

  • Step 7: Rebalance your portfolio

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    If bonds were purchased as part of a larger portfolio, ensure their weight aligns with your overall asset allocation strategy.

    Periodically reallocate funds based on life changes, market trends, or shifting financial goals.

  • Step 8: Be aware of tax implications

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    Interest income from bonds is taxable. Consider holding bonds in a tax-sheltered account like a TFSA or RRSP to minimize taxes.

  • Step 9: Seek professional advice (Optional)

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    If you're unsure, consult a financial advisor to help align your bond investments with your financial goals.

The best way to buy bonds in Canada is to purchase a bond fund, like a bond ETF.

There are bond funds that contain either corporate or government bonds, short or long-term bonds, or a mix of all of the above.

If you’re overwhelmed by the number of choices, it’s best to select a broad market bond fund that contains both domestic and international bonds of varying terms, from both corporations and governments. A bond ETF is the easiest way to invest in a diverse portfolio of bonds at a low cost.

To purchase shares of a bond ETF, all you need to do is select the ETF in your brokerage account during trading hours, and purchase the number of shares you want to add to your portfolio. Since ETFs are traded on the stock market exchange, your order will be filled and the shares in the bond fund added to your portfolio as soon as the trade is completed.

You will be charged the same commissions your brokerage account charges for any other ETF purchase.

  • Questrade is a discount broker that charges no commissions to purchase ETFs. You can buy as little as one share at a time and pay no trading fees. This makes it easy and free to add bonds to your investment portfolio with Questrade.

The interest payments you receive from the bonds in your bond ETF will be paid directly to your brokerage account, usually on a monthly basis. You can then use this cash to purchase more shares of the bond ETF or invest it in other ETFs or stocks. When bonds in the bond ETF mature, the fund manager will purchase new bonds to maintain the fund allocation and income.

Bond ETFs do have management fees and operating costs, which will be calculated in the fund’s Management Expense Ratio (MER). Bond MERs typically range from 0.05% to 0.20% depending on the ETF provider, which is comparable to stock ETFs.

Related: Management fee vs MER

The 5 best bonds to buy in Canada

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Another way to buy bonds is directly from the government or corporation issuing them. These are not traded on the stock exchange like a bond ETF, so you will need to contact a broker in order to make a purchase.

Your broker is a financial institution, brokerage, or another licensed financial advisor.

They will provide a list of bonds available for purchase, you select the one that you want and then contact them via phone, and they will make the purchase for you.

Brokers typically charge a flat rate commission to purchase bonds, so it only makes sense to make a purchase that is at least a few thousand dollars to keep your costs to a minimum. If you want to sell the bonds you own before they mature, you will need to call your broker again to make a trade and pay commissions again.

Interest payments from your bond will be deposited in the account you designate with your financial account, and this is the same account your investment capital will be returned to when the bond matures. If you want to re-invest your money in another bond, you will again have to call your broker and pay commissions to do so.

There are no management fees when you buy individual bonds. However, that’s because you have to take on the trouble of ensuring you have a diversity of bonds with different coupons and terms in your portfolio!

Choosing bonds for your portfolio

When it comes to selecting bonds for your investment portfolio, you want to include a mix of corporate and government bonds with varying terms and coupon rates. Like with stocks, diversification is key! The easiest and most affordable way to achieve this is with a bond ETF, otherwise, you will have to select an asset mix that contains dozens or even hundreds of different individual bonds to properly diversify your capital. If you’re interested in the environmental impact your finances have, you can also opt for adding Green Bonds to your portfolio along with your other bonds and bond ETFs.

Considerations and risks of bonds

While bonds are an essential investment to add to any portfolio, they are not risk-free. Bonds are typically less volatile than stocks, but they can go down in value. And there is also the risk that they will not be paid back.

  • Interest rate risk

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    If interest rates increase, the value of bonds decreases in response. The longer the term of the bond, the more sensitive its price is to interest rates. If interest rates see a further increase in 3 or 5 years from now, that will lower the value of bonds purchased today.

  • Issuer credit risk

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    There is also the possibility of the bond issuer not being able to pay back the capital they owe the bondholder on maturity. This is rare, which is why bonds are generally considered safer investments than stocks, but the risk is not zero. The more creditworthy the bond issuer, like a provincial or federal government, the more likely they are to make good on their debts. The riskier the bond issuer, like a new or struggling corporation, the higher the possibility that they may not be able to pay back the amount they borrow. The risk of the bond not being paid back is typically reflected in the coupon rate, which is why you see higher rates for longer less creditworthy issuers and bonds of longer terms.

    Nevertheless, bonds remain a less volatile investment than stocks and an excellent source of passive income for your portfolio. Carefully selecting the right mix of bonds as investments can protect your capital and generate a good return.

Are bonds a good investment in 2024?

As of November 2024, bonds present a compelling investment opportunity due to several key factors:

  1. 1.

    Attractive yields: Bond yields have risen significantly compared to previous years. For instance, midyear 2024 yields for 2-year and 10-year bonds were 4.71% and 4.36%, respectively, a notable increase from midyear 2021 yields of 0.25% and 1.45%1.

  2. 2.

    Positive return projections: Financial institutions project favourable returns for bonds. Morningstar forecasts a 5.7% gain in 2024 for U.S. investment-grade bonds, up from 4.9% in the previous year2.

  3. 3.

    Portfolio diversification: Bonds continue to serve as a stabilizing force in investment portfolios, offering diversification benefits and acting as a hedge against equity market volatility3.

  4. 4.

    Economic indicators: The Federal Reserve's monetary policy and economic conditions suggest a favourable environment for bonds. BlackRock notes that the resilience of labor markets and unique post-pandemic economic characteristics have influenced bond market dynamics4.

While the outlook for bonds is positive, investors should remain mindful of potential risks, such as interest rate fluctuations and economic uncertainties. Diversifying bond holdings and aligning them with individual financial goals and risk tolerance is advisable.

In summary, bonds are considered a good investment in 2024, offering attractive yields and diversification benefits in the current economic climate.

Will you buy bonds?

Bonds are fixed-income and fixed-term investments, which makes them similar to GICs, but they trade more like stocks.  They’re essential to balance and diversify your investment portfolio, and the easiest way to add them is with a bond ETF purchased through your brokerage account. Whether you’re looking to protect your portfolio against stock market volatility, or you just want to add a consistent passive income stream to your investments, bonds are the ideal choice.

Questions? Check out our FAQ or leave one in our community below. We look at all questions and will do our best to come back with valuable advice.

  • sources

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    1. https://corporate.vanguard.com/content/corporatesite/us/en/corp/articles/investment-economic-outlook-aug-2024.html

    2. https://www.morningstar.com/portfolios/experts-forecast-stock-bond-returns-2024-edition

    3. https://www.morganstanley.com/ideas/bond-market-outlook-fixed-income-2024

    4. https://www.blackrock.com/us/individual/insights/systematic-fixed-income-outlook

FAQ

  • What are the risks of bond investing?

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    Bonds carry risks like interest rate risk, where rising rates lower bond prices, and credit risk, where issuers may default on payments. Inflation risk erodes purchasing power, while liquidity risk may make selling bonds difficult. Reinvestment risk arises if interest rates drop, reducing returns on reinvested income. Diversification and careful bond selection can help mitigate these risks.

  • How do bond yields work?

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    Bond yields represent the return on a bond investment, expressed as a percentage. The current yield is calculated by dividing the annual interest by the bond’s current price, while the yield to maturity (YTM) measures the total return if held until maturity, accounting for interest, purchase price, and face value. Bond yields and prices are inversely related, meaning yields fall when prices rise and vice versa. They reflect both market conditions and the bond's associated risk.

  • What are the benefits of bonds?

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    Bonds offer stable income through regular interest payments, capital preservation with low risk (especially government bonds), and portfolio diversification, reducing overall volatility. They can act as a hedge against stock market downturns and provide predictable returns if held to maturity. Tax advantages may apply for certain bonds, like municipal bonds, depending on jurisdiction.

  • How do bonds compare to stocks?

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    Bonds are generally safer than stocks, offering stable income and lower risk, but with lower potential returns. Stocks provide higher growth opportunities but come with greater volatility and risk. Bonds suit income-focused, risk-averse investors, while stocks attract those seeking long-term capital growth. Combining both can create a balanced portfolio, blending stability with growth potential.

  • What factors affect bond interest rates?

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    Bond interest rates are influenced by inflation, economic growth, federal reserve policies, credit risk and market supply and demand. Higher inflation leads to higher interest rates. Strong economic growth raises rates as demand for credit increases. The bank of Canada rate can impact bond yields and a higher demand will lower yields (and vice versa).

  • How does inflation impact bonds?

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    Inflation reduces the purchasing power of a bond’s fixed interest payments, making them less valuable over time. In Canada, as inflation rises, bond prices typically decline, and yields increase to attract investors. Inflation-protected bonds, like Real Return Bonds (RRBs), can mitigate this risk by adjusting payments based on inflation rates. However, high inflation generally diminishes the appeal of bonds overall.

  • When is the best time to buy bonds?

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    The best time to buy bonds is when interest rates are high or expected to fall, as bond prices rise when rates drop. Bonds are also attractive during economic uncertainty or stock market downturns, providing stability and income. Timing depends on your financial goals, risk tolerance, and the type of bond, such as short-term or long-term.

  • What types of bonds are safest?

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    The safest types of bonds include government bonds, such as U.S. Treasury Bonds or Canadian Savings Bonds, which are issued by stable governments and carry minimal risk of default. Municipal bonds, backed by local governments, are also considered safe and often offer tax advantages. Additionally, investment-grade corporate bonds from companies with high credit ratings (e.g., AAA or AA) provide a low-risk option for investors seeking capital preservation over higher yields.

Bridget Casey Author

Bridget Casey is the award-winning entrepreneur behind Money After Graduation, a Canadian financial literacy website aimed at 20 and 30-somethings. She holds a BSc. from the University of Alberta, and an MBA in Finance from the University of Calgary. She has been featured as a millennial financial expert by Yahoo! Finance, TIME Magazine, Business Insider, CBC and BNN. Bridget was recognized as one of Alberta's Top Young Innovators in 2016.

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