Good call if you’re waiting for interest rates to rise further before committing money to bonds or guaranteed investment certificates.
Inflation has not yet been brought under control, which means interest rates must rise further than they already have. We may very well see bond yields rise along with the rates offered by GICs.
Still, there’s an argument for investing at least a token amount in bonds or GICs maturing in three to five years. Think of doing this as a hedge against a sharp setback for the economy that causes central banks to ease off on rate hikes. In a worst case, interest rates could peak and then settle back to lower levels.
Probably not, right? But this is 2022, the year of volatility. In the latter part of June and early July, recession fears caused a sharp pullback in the yield on Government of Canada bonds.
Here’s a question to ask yourself: would you be happy to make a nearly risk-free 5 per cent annually for the next five years? If the answer is yes, then consider adding some money to five-year GICs or bonds.
The 5 per cent return on GICs is available from Oaken Financial and Hubert Financial, online financial institutions that deal directly with investors. Just behind them in mid-July were a few alternative banks offering 4.85 per cent to 4.95 per cent for five years. Four-year returns topped out at 4.77 per cent, while the best three-year rate was 4.74 per cent.
A modest selection of investment-grade corporate bonds was available in mid-July with maturities in the area of five years and yields of 5 per cent or more. One example: a RioCan REIT bond maturing March 10, 2027, with a yield of 5.03 per cent. One more: a Fairfax Financial Holdings bond maturing Dec. 6, 2027, with a yield of 5.14 per cent.
Be prepared for buyer’s regret if you commit some money to GICs or bonds now. Rates will move higher if inflation continues to resist attempts to bring it under control. But those regrets won’t last.
Imagine it’s 2024, inflation is less than half current levels and the economy has worked through its post-pandemic kinks and entered a phase of modest growth like we saw in 2019. A 5 per cent return would look very good under those circumstances.
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