On the whole, this week’s news of cooling U.S. inflation is great for the financial world.
Stubborn inflation in the United States has kept bond yields high in both the U.S. and Canada. If inflation keeps easing in both countries, bond yields can fall and central banks can gradually reduce their benchmark interest rates. Consumers and businesses will benefit if they’re borrowers, and stocks should benefit as well.
Investors who favour guaranteed investment certificates are a different story. GIC rates are influenced by bond yields, and that means lower returns are very likely coming. Already, we’re seeing some slippage in GIC rates.
Returns of 5 per cent are pretty much gone for terms of two years and longer. Oaken Financial was an outlier in offering a two-year rate of 5.05 per cent as of mid-week. Five issuers had one-year rates of 5.05 per cent – Oaken, Saven Financial, Peoples Trust, Motive Financial and EQ Bank – and another three offered 5 per cent.
At online brokers, 5 per cent seems to be pretty much gone. One big bank-owned broker this week offered a 4.99 per cent one-year GIC from KEB Hana Bank Canada, a 4.98 per cent GIC from Versabank and 4.97 per cent GICs from Home Trust Co. and SBI Bank Canada. All these issuers are members of Canada Deposit Insurance Co., by the way.
Wondering what to do with your 2024 contribution to a tax-free savings account? A one-year GIC with a rate of 5 per cent gives you a competitive return when you consider the risk level is nearly zero. Stocks have done well lately, but pullbacks are possible. Bonds have been pitiful for most of the last five years and very likely offer an excellent buy-low opportunity. But bonds simply don’t offer the worry-free ownership experience of a GIC.
Using a TFSA circumvents a clear weakness of GICs, which is that they pay fully taxable interest. Dividends and capital gains are taxed more favourably. Another GIC flaw is liquidity, unless you buy a lower-yielding cashable version.
Liquid GIC alternatives include investment savings accounts, which are savings accounts packaged like mutual funds for use by investors, as well as exchange-traded funds that hold high interest savings accounts and treasury bills. All of these GIC alternatives yield between 4.25 and 4.7 per cent right now. Expect less after the next Bank of Canada rate cut, which could happen as soon as July 24.
-- Rob Carrick, personal finance columnist
Also see: Year-to-date total returns for U.S. Treasuries turn positive
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Compiled by Darcy Keith of The Globe and Mail