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RIP, five-year GIC?

Depending on who you're buying your guaranteed investment certificates from, you may want to consider locking up your money for no more than three or four years. In some cases, there's next to no extra yield available from longer terms. You may even be offered less for five-year terms than you are for three or four years.

The story here is a flattening yield curve, which means that yields don't vary much from short to longer terms. Flat yield curves suggest there's concern about where the economy is headed. The latest economic data in Canada and the United States adds some validity to this cautious outlook.

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You can see the flatness in the yield curve in Government of Canada bonds – the three-year bond had a yield of 0.6 per cent early in the week and five-year bonds yielded 0.66 per cent. Buying a five-year bond means you're willing to lend money to the federal government for five years instead of three for a laughably small premium of 0.06 of a percentage point.

Some firms are pricing their GICs so that yields step up gradually for terms of one year through five. This encourages people to use the tried and true strategy of bond laddering, where you invest equal amounts in GICs maturing in one through five years. By doing this, you limit your exposure if you have to renew GICs at lower rates in the future, and you leave yourself open to benefit at least a little if rates are higher on your renewal dates.

Some financial institutions seem to be discouraging clients from locking in money for five years. For example, Cannex.com shows Industrial Alliance was offering 1.85 per cent over three years at mid-week, 2.05 per cent over four and 1.8 per cent over five. A four-year ladder seems to makes the most sense in this case.

The online bank Canadian Direct Financial was offering 2.31 per cent for three years, 2.33 per cent for four years and 2.37 per cent for five years. A three-year ladder seems a reasonable choice in this case. Why tie yourself down for five years unless you worry you might have to renew at a lower yield on maturity?

That's a risk that can't be ignored. It's unlikely investors buying five-year GICs five years ago imagined that 2.3 per cent would be a really good five-year rate in mid-2016. So consider this approach to your GIC ladder: Lock in for five years if you're getting at least some yield premium over three- and four-year terms, and you think we're stuck in a low-rate world indefinitely. Shorten your ladder to three or four years if you're more optimistic.

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