The interest rate that heavily influences returns on guaranteed investment certificates fell sharply in late August, and that suggests lower GIC returns ahead.
But just at this moment, we have the best GIC rates of what has already been a very good year for conservative investing. Example: The online bank Tangerine this week offered a 1.5-year GIC with a rate of 6 per cent and a one-year rate of 5.95 per cent.
Rates well above 5 per cent have been available for terms of one through five years for a while now, and 6 per cent seemed like a possibility. Actually reaching 6 per cent may just represent the peak for GIC investing in this economic cycle.
A prime driver of GIC rates is the yield on Government of Canada bonds, which surged in the late spring and summer on concerns about the resilience of inflation. There’s now a growing sense that inflation’s momentum has finally waned and, as a result, Canada bond yields have backtracked a fair bit in recent days.
All of this suggests that today’s juicy GIC returns reflect yesterday’s financial market conditions. Unless bond yields pop back up again, expect lower GIC returns to come.
The persistence of high GIC returns reflects another influence on the returns these safe investment products offer investors. Banks issue GICs to fund lending for mortgages – if a bank wants to lend out more money in mortgages, it might improve GIC rates temporarily to lure more business.
I wrote not too long ago about the risks of over-relying on GICs. Most investors will need significant exposure to stocks to reach their long-term financial goals. But GIC rates between 5 and 6 per cent are awfully attractive as a component of your overall portfolio of investments.
As of late this week, it was possible to lock in 5 per cent or slightly more for five years at five alternative banks, including Motive Financial, EQ Bank and Oaken Financial. All are members of Canada Deposit Insurance Corp.
The Tangerine 6-per-cent offer is a reminder that the best rates today are for short-term GICs. Financial markets believe high rates will be with us for the near term, then fall. This explains the so-called inverted yield curve, which refers to the unusual phenomenon of short-term rates being higher than long-term rates.
We’ve seen several instances in the past year or so of bond and GIC rates peaking, falling back and then charging ahead again. It’s too soon to know if the latest move lower for bond yields will stick, but one thing is certain. A 6-per-cent GIC return is pretty special.
Rob Carrick