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iShares Core Canadian Universe Bond Index ETF (XBB $28.05)
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iShares Core Canadian Long Term Bond Index ETF (XLB $18.44)
The following was your response to a bond question I asked in '24.
"Nothing is guaranteed, but bonds' leverage is highly correlated to their maturity. CLF has a relatively low duration of 2.8 years, whereas XLB is 15 years. As a general rule, for every 1% increase or decrease in interest rates, a bond's price will change approximately 1% in the opposite direction for every year of duration. With a bond ETF in theory the move should be similar, and thus XLB in theory should see a much larger move than CLF when rates move (either way). In reality it is not so concrete, and depends on variables in the yield curve and other factors (supply/demand). But we would be very confident in saying that if rates move lower XLB's bond portfolio should do significantly better than CLF. Owning XLB is essentially a 'bet' that rates will drop. As such, we would be fine owning both XBB and XLB for a bit more diversification of bonds. XBB's duration is 7.5 years so a good middle ground between CLF and XLB."
Been watching XLB/XBB for some time now, and both appear to be in downward trends in terms of share price, and close on yields. Rates have been steady, or in decline, so I'm completely confused.
Please take a look and try to make sense of this for me?
Many thanks for your help.
At the time the question was answered (Jan 2024), the Canadian bond yield curve was inverted (short-term bond yields were higher than long-term bond yields). Since then, the yield curve has un-inverted and this means that short-term bond yields have fallen much more than long-term bond yields, and in fact, long-term bond yields have even risen.
So while the BoC overnight interest rate has fallen since then, this created a much steeper drop in the near-term bond yields than long-term, and as recent tariff and inflation headlines have come in, economists are increasingly concerned with 'sticky' inflation, which is causing long-term bond yields to rise.
XBB, having more exposure to short-term to intermediate-term bonds, benefited slightly more than XLB as a result. Long-term bond yields (CA20Y and more) have essentially been flat since 2022, and if long-term inflation expectations drop meaningfully, we would expect long-term yields to decline, and as a result XLB could see an increase.