For investors who need stable income and want to hold bonds, these two bond funds offer relatively low fees and high-quality holdings.

The Bank of Canada is unlikely to raise interest rates any time soon. That’s because low prices for oil and other commodities will likely continue to offset increased government spending and higher exports due to a low Canadian dollar.

Even so, the long-term outlook is for higher interest rates. That’s because heavy deficit spending and the expansion of the money supply in the past few years make higher inflation more likely.

We continue to advise against investing in bonds right now—today’s low interest rates make bonds unattractive, and rising rates would push down their future value.

However, if you need stable income and want to hold bonds, these two bond funds offer relatively low fees and high-quality holdings.

ISHARES CANADIAN SHORT-TERM BOND INDEX ETF (Toronto symbol XSB; buy or sell through brokers) mirrors the performance of the DEX Short-Term Bond Index.

This index consists of a range of investment-grade federal, provincial, municipal and corporate bonds with one- to five-year terms. The fund holds 449 bonds with an average term to maturity of 2.96 years. The bonds in the index are 65.7% government and 34.3% corporate. The fund’s MER is 0.28%.

The iShares Canadian Short-Term Bond Index Fund yields 2.3%, but this high yield is due to the fact that some of the fund’s bonds pay above-market interest rates. As a result, they trade above their face value. When these bonds mature, holders will only get the bonds’ face value, meaning the portfolio will incur predictable capital losses. These losses will offset some of the appeal of the above-market yields.

The key figure when looking at the long-term return of this fund is yield to maturity. This yield takes into account the series of capital losses the fund will experience as its above-market-rate bonds mature. The yield to maturity for the iShares Canadian Short-Term Bond Index ETF is 1.10%. That’s less than the 2.3% yield but still higher than the 0.51% you’d earn by investing in, say, a one-year T-bill.

If you want to invest in a bond fund, the iShares Canadian Short-Term Bond Index Fund is a buy.

Recommendation in Canadian Wealth Advisor: BUY.

ETFs: 0.33% MER for ISHARES Canadian Universe Bond Index ETF

ISHARES CANADIAN UNIVERSE BOND INDEX ETF (Toronto symbol XBB; buy or sell through brokers) mirrors the performance of the Canadian Universe Bond Index. The 1,119 bonds in the portfolio have an average term to maturity of 10.54 years. The fund’s MER is 0.33%.

The bonds in the index are 72.5% government and 27.5% corporate.

The fund yields 2.7%, compared to the Short-Term Bond Fund’s 2.3%. Its yield to maturity is 1.71%, 0.61 percentage points above the Short-Term Fund. That reflects the added risk of long-term bonds.

iShares Canadian Universe Bond ETF is a buy for safety-conscious investors who can accept that risk.

Recommendation in Canadian Wealth Advisor: BUY.

For our report on two leading Canadian ETFs we see as buys, read Blue Chip ETFs focus on Canada.

For our recent report on how to make the most of Canadian ETFs, read 4 tips for successful investing in Canadian exchange-traded funds.