When money pours out of the stock market, a lot of it ends up in bonds.
That’s the quick explanation of why bond prices have been surging lately while share prices sink. Unfortunately, rising bond prices produce lower yields. If you’re a conservative investor, this is really bad news.
People who favour bonds and guaranteed investment certificates have become used to low rates in recent years. Now, things are getting worse. The yield on the five-year Government of Canada bond plunged midweek to 0.88 per cent, which is close to half the level of 12 months ago. In the housing industry, they celebrate moves like this because they make five-year fixed-rate mortgages cheaper and houses more affordable (at least until house prices jump higher). But falling yields for five-year bonds also mean lower returns on five-year GICs.
As of early Thursday, there were several alternative banks and credit unions offering five-year GICs with yields between 2.7 and 2.9 per cent. One-year GIC rates topped out in the 2.4-to-2.5-per-cent range.
If you have money earmarked for GICs, every minute you delay in buying could cost you. GIC rates are way out of whack with bond yields, and this can’t last long. If you have GICs maturing in the months ahead, brace yourself for lower returns. It might be sensible to renew for a short term to see whether the current uproar over the coronavirus passes and rates jump back to where they were.
There’s some good news for investors who have held bonds and bond funds through the current financial market turmoil. Bonds are rising in price, and so are bond funds. For the 12 months to Feb. 29, the FTSE Canada Universe Bond Index delivered a total return (interest plus changes in bond prices) of 9 per cent. That’s better than double the average annual 10-year gain of 4.2 per cent.
The appeal of GICs is based on the fact that they don’t change in price. Your return is the yield you lock into, which is sobering at a time when rates are plunging.