One of the biggest drawbacks to investing in GICs faded away last month.
The inflation rate in March declined to 4.3 per cent from 5.2 per cent in February, which means it’s possible to earn a respectable real rate of return from a virtually risk-free guaranteed investment certificate.
The era of high returns in GIC-land is slowly approaching its end, but you could still get returns of 5 to 5.15 per cent as of late April on one-year GICs from alternative banks with deposit insurance. Forget about terms of three, four and five years – only deposit brokers offer GICs at 5 per cent or more for those terms. A couple of alternative banks offered two-year GICs with returns at that level.
The flow of money into GICs has surged in the past year or so as a result of a big increase in interest rates. Investors clearly like the idea of getting returns of 4 to 5 per cent or more with risk levels ground down to virtually nothing as long as they follow deposit insurance limits. But there’s been one big drawback to GIC investing: As good as rates were, inflation was higher. On an after-inflation basis, you lost money in a GIC.
For now, that’s done. If the decline in inflation this year is in line with what economists expect, a one-year GIC could conceivably mature at a rate that is two percentage points above inflation. Stocks might do better than that, but this potential is offset by the risk of losing money.
Among the financial institutions offering 5-per-cent one-year GICs as of late April were EQ Bank, LBC Digital, Motive Financial, Oaken Financial, Peoples Trust and Wealth One Bank of Canada, all of them members of Canada Deposit Insurance Corp.
Investors who buy GICs through their online broker should expect slightly lower rates than you can get by dealing directly with alternative banks. A look at the GICs available from a couple of brokers at the end of April uncovered one-year GICs with top rates just below 4.8 per cent.
GIC rates are influenced by yields in the bond market, which have zig-zagged a lot in 2023 as a result of uncertainty about the financial outlook. Ultimately, though, inflation will fall and both bond yields and GIC rates will follow. Twelve months from now, your biggest regret from investing in a one-year GIC today might just be that you didn’t buy more.
Rob Carrick