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It's time to reconcile our view about interest rates as borrowers and investors.

As borrowers, we've been acting like interest rates will never rise. How else could people rationalize the kind of mortgages they have to take on in some of the country's biggest cities? As investors, we take the oppose position. We see rates as being artificially low right now and bound to rise at some point.

I'm on record as having warned many times about rising rates, but I'm now in adjustment mode. What has me reconsidering is the kind of thinking found in a new report by TD Economics titled The New Normal: Low Rates in Advanced Economies for the Long Run. It argues that rates are low today because of weak global economic growth, and that they will move higher as the economy improves. However, rates will not return to levels we used to consider "neutral." The reason: Aging, and in some cases, shrinking populations across the industrial world. They'll keep a lid on growth in economic productivity and thereby reduce the need to crank rates higher.

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There are a lot of implications here for investors, one of them being that rising rates will not bail them out of any issues they're having in generating the investment returns they need. The 5-per-cent five-year guaranteed investment certificate, last seen almost 10 years ago, isn't coming back any time soon. We're actually a long way from 3 per cent GICs, at least from the big banks.

A few years ago, when it looked like rates were going to rise, floating or adjustable rate products were all the rage in bonds and preferred shares. It still makes sense to have a little exposure to this type of security as a hedge against a shock rate increase. But overall, you're sacrificing already thin yields for the potential to benefit from rate increases that could be, first, a while in coming and, second, modest when they do arrive.

Concern about rising rates has prompted many a warning for investors to stick to short-term bonds, which would fall less in price than longer-term bonds if rates rise. But we now need to ask ourselves if this protection is worth the yield we're giving up by not owning a diversified portfolio of short-, medium and long-term bonds.

I'll look at some more implications for investors of the evolving rate outlook in a future column. Stay tuned.

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