Rob Carrick
The plunge in government bond yields this year has done a brilliant sales job for guaranteed investment certificates.
The five-year Canada bond yield has been in the 0.75 per cent range in recent days, close to a full percentage point (that's 100 basis points to investing pros) below the levels of last April. Institutional investors may see a case for buying these bonds, but individual investors seeking secure income will want to pass. What to buy instead? Five-year GICs are a thought.
Posted five-year GIC rates at the big banks are in the range of 1.3 to 1.5 per cent, which is to say that even the stingiest of GIC providers beats government bonds by a large margin. Alternative banks and trust companies that are members of Canada Deposit Insurance Corp. are offering as much as 1.9 to 2.6 per cent (that latter rate was offered by Oaken Financial, a division of Home Trust, and it showed up on Cannex.com).
If you're willing to use a credit union, you can get up to 2.65 per cent at AcceleRate Financial, Achieva Financial and Outlook Financial, and 2.95 per cent at Hubert Financial. All are online divisions of Manitoba-based credit unions, which means they offer 100 per cent deposit insurance but no government backing. CDIC is backed by the federal government and has an insurance cap of $100,000.
When comparing similar vehicles, smart investors never fail to ask why one pays more than another. In this case, the government of Canada's financial stability in uncertain times allows it to finance its debt at very low rates. GICs are used by financial institutions to fund lending through mortgages and, to compete in the marketplace of investments, premium rates have to be offered. That's why bank GICs pay more than government bonds, and why credit unions offer more than banks.
Now for some frustrating news: Online brokerage firms often don't offer GICs from the banks and credit unions with the best rates. A quick check at a couple of big bank-owned online brokers found nothing better than 2.05 per cent for five years in their inventories of third-party GICs. To benefit from higher rates available elsewhere, you'll have to split off some of your money. It's annoying, but worth the extra yield.
Rob Carrick