One of my grandchildren was talking to a financial consultant at his bank last week. He was trying to find the best way to invest 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. But he wanted a decent return.
Sound familiar? Most conservative investors think exactly the same way.
The adviser came up with a combination of a low-risk monthly income mutual fund and a premium savings account paying 1.65 per cent. With inflation running at 6.3 per cent, neither my grandchild nor I were impressed. Go back and ask about GIC rates, I suggested. He did. Here’s what the adviser came back with.
- 388-day GIC – 5.20 per cent
- two-year GIC – 4.75 per cent
- three-year GIC – 4.22 per cent
Look at those numbers again. The bank is offering more income for shorter terms. The further out you go, the lower the interest rate. Normally, the opposite is true.
You may think this is some quirk at a small, online institution. Not at all. These rates were quoted by a Big Five bank – Bank of Nova Scotia to be precise.
Scotiabank isn’t alone. I checked Toronto-Dominion Bank and found these posted rates:
- one year – 4.65 per cent
- two years – 4.35 per cent
- three years – 3.75 per cent
- four years – 4.00 per cent
- five years – 4.05 per cent
Note that the five-year rate is 60 basis points lower than the one-year rate. (A basis point is 1/100th of a percentage point.)
What we’re seeing is the impact on commercial rates of the inverted yield curve we’re experiencing. That’s a scenario in which short-term bonds are offering higher yields than longer-term issues. As of Jan. 26, two-year Canada bonds were yielding 3.62 per cent, five-year issues 2.95 per cent, and 10-year maturities 2.85 per cent. This is a rare situation and is usually a precursor to a recession.
The message is that if you have money you don’t expect to need for a while, don’t leave it in some low-interest (or even high-interest) savings account. As long as you can meet the minimum investment requirement, put it in a one- or two-year GIC and take advantage of this disruption in the market while you can.
Many banks and credit unions are offering special deals on short-term GICs right now, so ask about promotions before you agree to anything. Also, check out the rates being offered by smaller financial institutions. I went to ratehub.ca and found that Saven Financial had the best quotes in all categories out to five years, with one or two years at 5.30 per cent ($1,000 minimum). The five-year rate was 5.15 per cent. Saven is provincially insured.
There were many other quotes within a few basis points of those from Saven. Oaken Financial is offering 5.25 per cent for one year. EQ Bank and Alterna Bank are quoting 5 per cent. All three are covered by the Canada Deposit Insurance Corporation.
Of course, these rates are all below the current inflation rate, but if you can live with that and want safety above all else, there are lots of good choices out there.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.