Stock Smarts: Benefitting From a Topsy-Turvy GIC Market
Short-term bonds are offering higher yields than longer term issues. Photo: Nuthawut Somsuk/Getty Images
One of my grandchildren was talking to a financial consultant at his bank last week. He was trying to find the best way to invest the money he had accumulated for college over the next four years. He didn’t want to take big risks – any losses would be difficult to make up. But he wanted a decent return.
Sound familiar? Most conservative investors think exactly the same way.
The advisor came up with a combination of a low-risk monthly income mutual fund and a premium savings account paying 1.65 per cent. With inflation running at 6.3 per cent, neither my grandchild nor I were impressed. Go back and ask about GIC rates, I suggested. He did. Here’s what the advisor came back with.
388 day GIC – 5.20 per cent
2 year GIC – 4.75 per cent
3 year GIC – 4.22 per cent
Look at those numbers again. The bank is offering more income for shorter terms. The farther out you go, the lower the interest rate. Normally, the opposite is true.
You may think this is some quirk by a small, on-line institution. Not at all. These rates were quoted by a Big Five bank – the Bank of Nova Scotia to be precise.
BNS isn’t alone. I checked TD Bank and found these posted rates:
1 year – 4.65 per cent
2 years – 4.35 per cent
3 years – 3.75 per cent
4 years – 4.00 per cent
5 years – 4.05 per cent
Note the five-year rate is 60 basis points lower than the one-year rate. (A basis point is 1/100th of a percentage point.)
What we’re seeing is the impact on commercial rates of the inverted yield curve we’re experiencing. That’s a scenario in which short-term bonds are offering higher yields than longer term issues. As of Jan. 26, two-year Canada bonds were yielding 3.62 per cent, five-year issues 2.95 per cent, and 10-year maturities 2.85 per cent. This is a rare situation and is usually a precursor to a recession.
The message is that if you have money you don’t expect to need for a while, don’t leave it in some low interest (or even high interest) savings account. As long as you can meet the minimum investment requirement, put it in a one- or two-year GIC and take advantage of this disruption in the market while you can.
Many banks and credit unions are offering special deals on short-term GICs right now so ask about promotions before you agree to anything. Also, check out the rates being offered by smaller financial institutions. I went to ratehub.ca and found Saven Financial had the best quotes in all categories out to five years, with one or two years at 5.30 per cent ($1,000 minimum). The five-year rate was 5.15 per cent. Saven is provincially insured.
There were many other quotes within a few basis points of those from Saven. Oaken Financial is offering 5.25 per cent for one year. EQ Bank and Alterna Bank are quoting 5 per cent. All three are covered by the Canada Deposit Insurance Corporation and all have a minimum deposit of $1,000 or less.
Of course, these rates are all below the current inflation rate, but if you can live with that and want safety above all else, there are lots of good choices out there.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca.
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