If you were looking for portfolio security back in 2022, GICs were the screamingly obvious choice over bonds.
Back then, guaranteed investment certificates offered yields of as much as 5 per cent for terms of one through five years at alternative banks. That same year, bonds produced an annual loss of 11.7 per cent, including both interest and price changes. While bonds have done okay since then, investor confidence in them has remained shaky.
Today, bonds are the better bet than GICs. Bonds offer capital gains potential, GICs do not. And bonds are very liquid, while only cashable, lower-yielding GICs offer this benefit.
GICs have had a yield advantage over bonds in recent years, but today’s differential isn’t nearly as pronounced. The benchmark FTSE Canada Universe Bond Index yield to maturity in mid-March was about 3.3 per cent. A few alternative banks offered better yields – as much as 3.5 per cent to 3.95 per cent for terms of one through five years. But overall, the GIC yield advantage isn’t what it once was.
GICs sound good because they don’t fall in price when markets are volatile. But neither can they rise in price, as bonds do when interest rates are falling. As it happens, there’s a very strong expectation right now that interest rates will fall if the economy is dragged down by tariffs. If this happens, bonds offer potential for a decent total return of price increases and interest payments.
Rising rates crush bonds – that’s the 2022 story in brief. But it’s hard to build a case for rate increases at a time when the economy is under threat. The tariff war could lead to higher consumer prices, but the Bank of Canada will not want to stifle the entire economy with rate hikes.
The liquidity benefit of bonds is significant because it helps you assert some control over the financial market uncertainty to come. If your bond funds or individual bond holdings rise in price as stocks tank, you could take some profits and use them to buy beaten down shares.
GICs are a brick wall between you and financial market mayhem, an appealing proposition right now. But holding bond funds or bonds makes sense right now. Bonds blew it in 2022, but now they’re back.
