Soaring interest rates have turned boring old guaranteed investment certificates into an investing hotspot.
GIC sellers report huge increases in sales, and I’m getting more GIC-related enquiries from readers than in all my decades of writing about money. A bunch of these e-mails have come in since the Bank of Canada raised its trendsetting overnight rate by a surprisingly high one percentage point last week. What people want to know is why GIC rates didn’t react to the Bank of Canada’s big move.
I wrote an explainer on how rates work recently and included GICs. For more on how GIC rates are set, I got in touch with Mahima Poddar, senior vice-president and group head of personal banking at EQ Bank.
“GIC rates are heavily driven by the competitive market for GICs,” Ms. Poddar said. “But, generally, they’re priced based on a spread to Government of Canada bonds. They don’t actually get priced using the Bank of Canada benchmark rate.”
Rising yields on government bonds help explain why one-year GIC rates have surged to as much as 4.3 per cent as of mid-July and five-year rates to as much as 5.05 per cent. The bond market has already anticipated big increases in the Bank of Canada’s overnight rate – that’s a big reason why the yield on the five-year Canada bond has risen to a tick below 3 per cent as of Friday morning from about 0.8 per cent a year ago.
The GIC market is highly competitive these days, notably among alternative financial institutions like EQ that compete with the big banks to attract clients and their money. Ms. Poddar said EQ continually balances rates offered by competitors against its own need to attract funds that can be used in the mortgage lending business of its parent, Equitable Bank.
A trend to keep your eye on if you’re a GIC rate watcher: concern about rising rates causing a recession has pushed bond yields down from a mid-June peak for the year of 3.5 per cent. Competition between alternative banks and credit unions remains aggressive, but what’s happening in the bond market suggests GIC rates may have peaked for the near term.
Rising rates this year have also pushed up interest paid on high rate savings accounts, but not to levels comparable with one-year GICs. Ms. Poddar said the Bank of Canada’s benchmark rate has a role in the setting of savings account rates, but so do competitive factors and business-related matters like keeping the right balance between client funds held in locked-in GICs and savings accounts where money can be withdrawn at any time.
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Rob Carrick