GIC rates are below 5% now, but they’re a better deal than ever in one way

Interest rates paid by guaranteed investment certificates are falling, but so is inflation.

The return on an investment minus inflation is what really matters. In fact, this net result is called a real rate of return. Today, real rates of return on GICs are better than they were a year or so ago, when GIC rates were peaking.

Let’s say you nailed a 5.5 per cent rate on a one-year GIC 12 in August 2023, when the year-over-year inflation rate hit 4 per cent.

Your real rate of return then was 1.5 per cent, which isn’t too bad at all if you adjust for the fact that your risk of losing money was nil if your deposit is fully covered by deposit insurance.

Today, GIC rates for one-year terms are in the 4.7 to 4.9 per cent zone at best. If you locked down a rate of 4.8 per cent, your real rate of return with the current 2.7 per cent inflation rate would be 2.1 per cent. That’s 0.6 of a point better than 12 months ago.

Expect interest rates to continue to decline in the next 12 or so months, and GIC returns as well. Inflation will do likewise, which means GICs will remain a solid option for investors seeking reliable returns with virtually no risk of losing money.

Some investors have been using GICs to supplement or replace bonds, but it’s now time for a rethink of that strategy. Whereas rising interest rates were brutally hard on the market price of bonds and bond funds, falling rates will propel prices higher.

Combine these price gains with bond interest and you have potential for total returns that exceed GICs. For the 12 months to July 31, the benchmark FTSE Canada Universe Bond Index delivered a total return of 7.3 per cent. Given the badness of bonds in recent years, we should see more of a rebound ahead.

The predictability of GIC returns works two ways – you can depend on GICs in turbulent times, but you might also miss out when financial markets are strong. The flood of money into GICs in the past few years suggests a lot of investors are willing to accept this trade-off.

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