The stock market giveth, and taketh away. Same for the bond market, as we found out in 2021-22.
Guaranteed investment certificates just give. That’s why money poured into GICs in 2023. Returns were as high as 5 per cent to 6 per cent, with virtually zero risk of losing money if you stayed within deposit insurance limits.
Yes, GIC interest income is taxed like regular income in non-registered accounts, unlike dividends and capital gains. Yes, stocks were on track to do better in 2023. But if you factor risk into the analysis, GICs shone in a very stressful year for money. That’s why I picked them as the investment product of 2023.
There’s virtually no chance of a repeat in 2024, though. We’ve had a great run with GICs, but they’re about to become a fair bit less attractive.
Rates on GICs partially reflect how willing the issuing bank or financial company is to compete for investor money. But the bigger factor is what’s happening in the bond market. While there’s no precise or immediate correlation, GIC interest rates follow the trends in bond yields.
Since the beginning of October, the bottom has fallen out of bond yields. The five-year Government of Canada bond, a trendsetter for five-year GICs, fell to around 3.2 per cent in late December from 4.4 per cent on Oct. 3. In the bond world, that’s a staggeringly big change in such a short span of time.
GIC rates have reflected the decline in bond yields only minimally, though. Expect more of a pullback for GICs in early 2024, unless bond yields bounce higher again. Five-per-cent returns for five years could soon be gone for good.
Shorter-term GICs offer better yields, an oddity that highlights the view in financial markets that inflation and high interest rates are a near-term issue and will fade over the longer term. Expect one- and two-year GIC yields to decline as the Bank of Canada gets comfortable enough with the inflation outlook to begin lowering its overnight rate. This could happen as soon as the first half of 2024.
To sum up, the current opportunity to lock in money with rates of 5 per cent to 6 per cent is limited. If you’re looking for better rates than we have today, snap out of it. Unless we see a disastrous resurgence of inflation, GIC rates have seen their peak.
Three additional thoughts on GICs going forward:
- Don’t hesitate to try and squeeze some extra yield from GICs sold by a bank where you do substantial business. Readers report some success by asking for a bump up in GIC rates.
- Do not let a bank sell you an index-linked GIC, with returns tied to stock indexes or sectors; market-linked GICs are lucrative for banks, less so for clients.
- Try a GIC broker if you have a big amount to invest and want help staying within deposit insurance limits and finding the best rates.
Rob Carrick