Gordon Pape: How to take advantage of a topsy-turvy GIC market

Gordon Pape: How to take advantage of a topsy-turvy GIC market

One of my grandsons spoke to a financial advisor at his bank last week. He tried to make the best use of the money he had accumulated for college over the next four years. He didn’t want to take big risks – any losses would be difficult to make up for. But he wanted a decent return.

Sound familiar? Most conservative investors think the same way.

The consultant developed a combination of a low-risk mutual fund with monthly income and a premium savings account at 1.65 percent. With inflation at 6.3 percent, neither my grandchild nor I was impressed. Go back and ask about the GIC prices I suggested. He has. Here’s what the advisor brought back.

GIC for 388 days – 5.20% GIC for 2 years – 4.75% GIC for 3 years – 4.22%

Look at those numbers again. The bank offers more income for shorter maturities. The further you go, the lower the interest rate. Usually the opposite is the case.

You might think that this is a quirk of a small online institution. Not at all. These rates were quoted by a Big Five bank – the Bank of Nova Scotia to be precise.

BNS is not alone. I checked TD Bank and found these published rates:

1 year – 4.65 percent 2 years – 4.35 percent 3 years – 3.75 percent 4 years – 4.00 percent 5 years – 4.05 percent

Note that the five-year interest rate is 60 basis points lower than the one-year interest rate. (A basis point is 1/100 percentage point.)

What we are seeing is the impact on commercial rates of the inverted yield curve we are experiencing. This is a scenario in which short-term bonds offer higher yields than longer-term issues. On January 26, Canadian two-year bonds yielded 3.62 percent, five-year issues 2.95 percent and 10-year maturities 2.85 percent. This is a rare situation and usually heralds a recession.

The message is, if you have money that you probably won’t need for a while, don’t leave it in a low-interest (or even high-interest) savings account. As long as you can meet the minimum investment requirements, stick them in a 1-year or 2-year GIC and take advantage of this market disruption while you can.

Many banks and credit unions are currently offering special offers on short-term GICs, so ask about promotions before agreeing to anything. Also look at the interest rates offered by smaller financial institutions. I went to ratehub.ca and found that Saven Financial had the best rates in all categories up to five years, with a year or two at 5.30 percent (minimum $1,000). The five-year rate was 5.15 percent. Saven has country insurance.

There were many other listings within a few basis points of Saven’s. Oaken Financial offers 5.25 percent for one year. EQ Bank and Alterna Bank state 5 percent. All three are covered by Canada Deposit Insurance Corporation and all have a minimum deposit of $1,000 or less.

Of course, these rates are all lower than the current rate of inflation, but if you can live with that and, more importantly, want security, there are plenty of good options.

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