Welcome to the top of the mountaintop for returns on guaranteed investment certificates. We won’t stay there long, if a growing number of indicators are correct in suggesting interest rates have stabilized and will head lower next year.
You could still get 6 per cent rates on one- and two-year GICs as of late this week from Motive Financial and Oaken Financial, and rates of as much as 5.7 per cent were available from a variety of issuers for terms of three to five years. Big bank specials offered this week included 5 per cent returns for various terms, including five years. GIC investors, it’s unlikely you’ll see any better than these. If you’re thinking about putting money in GICs, act now.
The real question is when rates on GICs start to edge lower. In the past several weeks, the financial market interest rates that guide returns for guaranteed investment certificates have fallen hard. Five-year GICs are influenced by five-year Government Canada bonds, which have seen a decline in their yields lately to a tick below 3.6 per cent from 4.4 per cent in October. That’s a huge drop in bond-market terms, but GIC rates have barely reacted.
Bond yields fell in the spring on the expectation that inflation was tamed, and this in turn led to a steep drop in GIC returns. Inflation worries surged in the ensuing months, catapulting GIC rates higher again. A resurgence by inflation can’t be 100 per cent ruled out, but it appears highly unlikely.
The inflation rate itself has started to pull back, and economic growth is stalling. The Bank of Canada has an opportunity to adjust its overnight rate next week and it’s expected to do nothing, thereby validating the view that rates have peaked. Economists expect rate cuts by the bank as soon as next spring.
GICs aren’t the complete answer to your investing needs, but they do offer a way to secure an inflation-beating return for a slice of your portfolio with virtually zero risk as a result of deposit insurance. Expect stocks to outperform in the long term, though with much drama along the way.
Also, keep in mind that there’s reinvestment risk with GICs. Today’s one- or two-year GIC in the 5 to 6 per cent rate will very likely pay out less when renewal time comes.
-- Rob Carrick, personal finance columnist
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Compiled by Globe Investor Staff