If you want to capitalize on the recent upward trend in interest rates, consider an annuity.
There’s a growing sense that economic weakness will cause the Bank of Canada to start cutting its overnight rate next month. But for now, rates in the bond market have been moving higher. The five-year Government of Canada bond had a yield of 3.8 per cent at the beginning of this month, up from 3.2 per cent in late January. In bond-land, that’s a big move.
The bond market is still worried about inflation, which is particularly sticky in the United States. Bond prices have been under pressure, which in turn pushes up yields. This is an unwelcome development for people renewing mortgages or buying homes, but investors can benefit.
Returns on guaranteed investment certificates are influenced by bond yields, but so far there’s been little movement in GICs. The best five-year rates range from 4.5 to 4.75 per cent, while one- and two-year GICs continue to pay as much as 5 to 5.4 per cent.
Rising bond yields are improving returns for annuities, where you hand an insurance company a lump sum in exchange for a guaranteed lifelong stream of income. A quote for a registered annuity supplied by insurance adviser Rino Rancanelli shows a 65-year old woman could have received $6,515 annually from a $100,000 investment on May 1, up almost 2 per cent from $6,388 a year earlier. A 65-year old male could have received $6,956 annually at the start of May, 2.3 per cent more than the $6,798 available April 1.
GIC issuers have so far been unwilling to adjust returns to moves in the bond market, which could reflect a belief that bond yields will turn lower soon. Quiet times in the housing market may also be a factor. Financial institutions use money raised from the sale of GICs to fund mortgages. Stronger demand for mortgages tends to produce more rate competition in GIC rates.
Another way to benefit from the recent uptick in rates is a money market fund. Exchange-traded funds in the money market category had yields in early May as high as 5.2 per cent on an after-fee basis. The drawback with money market funds is that their yields rise and fall according to what’s happening in financial markets. GICs let you lock in a rate for a set term, while annuities basically last as long as you do.
-- Rob Carrick, personal finance columnist
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