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Is the safety of government bonds worth it if you’re a safety-first investor?

The short answer to this question is no. Not with yields on both federal and provincial government bonds as low as they are today. You’re better off with guaranteed investment certificates from alternative banks and trust companies that are part of a deposit-insurance plan.

A look at one online brokerage firm’s bond inventory in early January showed how hard it is to wring a decent yield out of a government bond these days. One-year federal and provincial government bond yields topped out at 1.3 per cent. Extend the term to five years and your best deal would be a yield of about 1.8 per cent.

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What’s a decent yield today? Something that puts you ahead of recent trends in the inflation rate, which has ranged around 2 per cent. For that, safety-first investors should consider GICs ahead of government bonds.

The same online broker that provided the just-mentioned bond quotes offered a wide selection of one-year GICs with rates between 2.1 and 2.25 per cent. All these GIC issuers are part of Canada Deposit Insurance Corp., or a provincial credit union insurance plan.

Willing to lock in money for five years? You’ll find the same flattish yield curve in GIC rates that you see with bond yields, but GICs still have an advantage. A flat yield curve means short- and long-term rates are pretty much the same, which is a departure from normal conditions where short rates are notably lower than long rates.

Quite a few five-year GICs in that online broker’s inventory offered yields right around 2.4 per cent. You’ll have to decide whether that’s enough of a yield premium to justify locking in money for five years instead of one or two. If you want to avoid guessing which term is best, consider the tried and true concept of the bond ladder. You make equal investments in terms of one through five years and reinvest maturing money in a new five-year term.

Don’t buy GICs without considering the two ways government bonds shine. In a stock market correction or a recession, government bonds will rise in price and deliver capital gains (at least on paper) for bond holders. GICs are what they are – basically a contract to pay a set rate of interest for a set period of time. You can’t trade GICs like bonds, which means you cannot exit them quickly and easily before maturity. Cashable GICs are an exception, but there’s a significant yield penalty with these.

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