After decades on the sidelines, fixed income investing makes its return
August 17, 2023
There was a time, way back when, when you could easily make an annual return of 16 per cent or more simply by signing up for payroll Canada Savings Bonds at work.
Are those days coming back, at least in part, now that interest rates on guaranteed investment certificates have topped the five per cent mark? Save with SPP took a look around to see what’s happening — for the first time in decades — in fixed-income investing.
A recent Wealth Professional article declares that “bonds are back.”
“After a long period in the unfashionable doldrums, fixed income has come roaring back with some tempting offerings that could be music to the ears of wealth managers,” writes Catherine Lafferty.
She quotes Macan Nia of Manulife as saying “a lot of the issues in the financial markets and for financial advisors was [around] this search for yield and how we drive income for our clients that are retiring. The good news is right now we simply clip the coupon. We believe they are attractive opportunities just in yield.”
OK, so bonds are suddenly a better investment. What about other forms of fixed income?
You don’t have to buy bonds (which pay interest, normally once or twice a year, until they mature) to benefit from today’s higher interest rates, writes Rob Carrick in The Globe and Mail.
Even a simple high interest savings account (HISA) can pay you “2.5 to 4.1 per cent right now,” he writes. A nice thing about HISAs is that your money is not tied up for a set period of time as it would be with a bond or guaranteed investment certificate (GIC).
There are now even exchange-traded funds that are basically an index fund of HISAs, Carrick notes.
“ETF HISAs offer after-fee yields around five per cent right now, but you may have to pay brokerage commissions to buy and sell,” he writes. There are also “mutual fund-style HISAs” that offer yields of 4.2 to 4.6 per cent, he continues.
The good old GIC is also looking more attractive, Carrick writes.
“If you have money to lock into GICs and want a great rate, now’s not a bad time to buy because there are 5 per cent yields available for terms of one, two, three and, in the case of EQ Bank, five years,” he writes. There are also cashable GICs — you can cash them in whenever you want — but those pay roughly one to 1.5 per cent less in interest, Carrick notes.
Equitable Bank’s Mahima Poddar tells Global News that the rise in interest rates has definitely rekindled interest in GICs.
“I do think we’re going to see more and more people going back to GICs,” she tells Global. There is a lot of downside risk these days to equity investment, she continues, with many people getting “burned.”
“When you compare that to a guaranteed five per cent rate with no downside risk, it becomes incredibly attractive,” she tells Global.
We have had several friends and family members over the years who prefer the lower risk of interest investing over the potentially higher returns from equities. Having lost a shirt or two on “can’t miss” fibre-optic network construction companies and the odd copper mining firm in the past, we must concede that risk is, well, pretty risky.
It’s probably safer to have a balanced approach, and that’s exactly how the Saskatchewan Pension Plan runs its retirement savings pool. The Balanced Fund is 41 per cent invested in Canadian, U.S. and International equities. On the interest side, bonds, private debt, mortgages and money market investments represent 30 per cent of assets. The rest of the fund is invested in what are called “alternative” investment such as infrastructure and real estate. Check out SPP today!
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Written by Martin Biefer
Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. A veteran reporter, editor and pension communicator, he’s now a freelancer. Interests include golf, line dancing and classic rock, and playing guitar. Got a story idea? Let Martin know via LinkedIn.