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High rates are a big part of the surge in interest in guaranteed investment certificates lately, but safety plays a big role as well.

What do you get if you lose the guarantee and instead invest in a bond offering comparable yields to GICs right now? Two benefits stand out right now – somewhat higher yields and the potential for capital gains if interest rates fall meaningfully before a bond’s maturity date is reached.

There’s a lot to choose from if you’re looking for investment-grade corporate bonds maturing in five years or less with a yield in the area of 5 to 6 per cent. Issuers include Brookfield Asset Management, Emera Inc., Enbridge Inc., Rogers Communications Inc., many banks and the credit arms of various automakers. A wide range of real estate investment trust, or REIT, bonds were available as well when we looked.

Investment grade means a credit rating of BBB or higher. Default risk eases as you move into A ratings, with top AAA ratings generally reserved for countries. Canada’s credit rating from DBRS Morningstar and Standard & Poor’s is AAA. Below BBB, we find high-yield bonds, also known as junk bonds. Higher yields mean higher risk of default on both interest payments and repayment of capital on maturity.

Five-year GICs offering 5 per cent or slightly more are plentiful just now. But the selection of REIT bonds is also quite varied at many online brokerages. One broker recently listed a First Capital Realty bond that matured in May, 2026, and offered a 6-per-cent yield. Another broker had a Calloway REIT bond that matures in August, 2026, and had a yield of 5.5 per cent. Still another had a RioCan REIT maturing in April, 2023, with a yield of 5.2 per cent.

Both shares and bonds issued by REITs have been under pressure lately as a result of high interest rates. Interest paid by REIT bonds, while in no way guaranteed like GIC interest, takes precedence over distributions made to REIT shareholders.

The business outlook for REITs could be better. If a recession hits in the months ahead, the occupancy rate for REITs that own commercial properties could be negatively affected. Don’t dismiss the risk of owning REIT bonds, but stay open to the upside.

Bonds fall in price when interest rates rise, and they’ll rebound when rates inevitably head lower in the future. GICs stay put – they pay interest, safely, and that’s it.

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