One of the quieter stories of investing in the past 18 months is the plight of the conservative investor.
The benchmark Canadian and U.S. stock market indexes were up around 40 per cent in the past 12 months, whereas a one-year guaranteed investment certificate at the end of November offered yields of 1.65 per cent at best and five-year GICs topped out around 2.5 per cent to 2.85 per cent.
We hear a lot these days about the outlook for higher interest rates in the next two years, which suggests better times for GIC investors ahead. But recent developments in the GIC world argue for investing at least some money right now.
GIC rates have actually been rising slowly since August, says Bill Ritchie, president and chief executive officer of GICdirect.com Financial in Victoria. The pace quickened in October and again in November. “I think that it’s partly due to a couple of institutions outbidding each other a little bit, looking for deposits,” he said. “I don’t know if at some point they may achieve their deposit goals and start dropping rates a little bit.”
Already, the best one-year rate he’s been able to offer has fallen back to 1.6 per cent from 1.85 per cent. That 2.85 per cent, available from a small bank that works with deposit brokers, was still available in late November. “We’re finding that at 2.85 per cent, a lot of people are going five years and just locking in.”
Higher rates have helped perk up the GIC sector for the first time since the pandemic hit and interest rates plunged. Mr. Ritchie figures that sales at his company will be up 18 per cent for the August through November period compared with the same time last year.
It’s quite possible that GIC rates rise further next year, when the Bank of Canada is expected to start the process of getting interest rates back to more normal levels. But those GIC rate hikes may not be dramatic, and it’s possible we could see rates from the most aggressive issuers pull back a little. This argues for putting at least a little money in GICs now rather than waiting for better rates ahead.
I recently happened to come across something I wrote in August, 2018, that was headlined, “The Long, Dark Night for GIC Investors and Savers has Finally Come to an End.” Interest rates were on the rise back then, with some alternative banks offering 3 per cent to 3.5 per cent for five-year GICs. What happened next is worth noting.
As we got into 2019, interest rates began to fall. Those 3.5 per cent five-year GICs didn’t last long.