Updated: April 2025  |  bremo.io financial guides

Bond Investing in Canada 2025 — How Bonds Work in a Portfolio

Bonds are a fundamental asset class that most Canadian investors hold as part of a diversified portfolio. They provide income, reduce volatility, and serve as a counterweight to equity risk. Understanding how bonds work helps you make better decisions about your overall asset allocation.

What Is a Bond?

A bond is a loan you make to a government or corporation. In exchange, the issuer promises to pay you a fixed interest rate (the coupon) for a set period and return your principal at maturity. For example, a 10-year Government of Canada bond at 3.5% pays 3.5% annually and returns your principal in 10 years.

Why Hold Bonds?

• Stability: Bonds are less volatile than stocks — they cushion portfolio declines during equity market crashes
• Income: Regular coupon payments provide predictable income
• Diversification: Bonds and stocks often don't move in the same direction
• Rebalancing tool: When stocks fall, bond values often rise, allowing you to sell bonds and buy stocks at lower prices

Interest Rates and Bond Prices

Bond prices move inversely to interest rates. When rates rise, existing bond prices fall (newly issued bonds offer better rates, making old bonds less attractive). When rates fall, bond prices rise. This "duration risk" is why holding long-term bonds in a rising rate environment can cause short-term losses even in a "safe" asset.

Types of Canadian Bonds

• Government of Canada bonds: Lowest risk, backed by the federal government
• Provincial bonds: Province-backed, slightly higher yield than federal
• Corporate bonds: Higher yield, more risk — depends on issuer's creditworthiness
• Inflation-linked bonds (RRBs): Return linked to CPI inflation

Canadian Bond ETFs

• ZAG: BMO Aggregate Bond Index ETF. Broad Canadian bond exposure. MER 0.09%.
• VAB: Vanguard Canadian Aggregate Bond ETF. MER 0.09%.
• XBB: iShares Core Canadian Universe Bond ETF. MER 0.10%.
• VSB/ZSB: Short-term bond ETFs — less interest rate risk than aggregate bond ETFs.

How Much to Allocate to Bonds?

Common guidelines: subtract your age from 110 to get your equity percentage. A 40-year-old might target 70% stocks and 30% bonds. But this rule of thumb doesn't fit everyone — a 40-year-old with a high income and risk tolerance might be comfortable at 90/10. All-in-one ETFs like VGRO build in a 20% bond allocation for you.