It was fun while it lasted, but five per cent yields on guaranteed investment certificates (GICs) are likely gone for a long, long time.
The Bank of Canada drove another nail in the coffin for Canadians who invest in fixed income this week after slashing its benchmark interest rate by a whopping 50 basis points (half of a per cent) to 3.75 per cent. Added to the 25-basis-point cuts made in June, July and September, the key lending rate has fallen swiftly from a three decade high of five per cent since spring.
That’s good news for borrowers and homeowners with mortgages as the major Canadian banks respond with their own 50 basis point cuts in their prime lending rates.
Not so much for the millions of Canadians saving for retirement. One-year yields on GICs have been dropping at a faster pace since last fall, and further declines in bond and other fixed income payouts are expected.
“The GIC fiesta started winding down last spring when the Bank of Canada decided to officially pivot,” says Robert McWhirter, mortgage strategist with MortgageLogic.news.
He says one-year GICs have plummeted an average 185 basis points since last fall’s peak as the Bank of Canada trimmed its rate by only 125 basis points.
For investors playing at home, McWhirter provides links to calculate comparisons using any two dates:
- GIC rates when Canada’s five-year yield peaked for this cycle on Oct. 3, 2023
- GIC rates the day before the first Band of Canada rate cut on June 4, 2023
- GIC rates today
Back to murky waters
The only alternative for income-hungry investors who need five per cent plus returns to meet their retirement goals are dividend stocks trading in the murky waters of the equity market.
Right now, some of the old Canadian dividend stalwarts such as the big banks are offering yields above five per cent, but when it comes to saving for retirement, the volatility of dividend income is no substitute for the safety of fixed income.
Fixed income parties on
As the term implies, a fixed income payout is essential at maturity for those in, or nearing retirement to ensure they can meet day-to-day expenses.
In most cases, it’s good to hold a significant portion of a portfolio in fixed income regardless of yield.
That gives investors looking for more security the option of allocating more of their assets to fixed income and still meet returns goals.
The right mix between fixed income and equities depends on the individual investor but a qualified advisor can help formulate strategies to maximize fixed income returns by staggering maturities within a portfolio to take advantage of the best going yields as often as possible.
The most common strategy, known as laddering, ladders maturities over a fixed period of time.
A general rule is to allocate a percentage of your portfolio to fixed income equal to your age. In other words, if you are 50 years old, half of your portfolio should be in fixed income. It’s a way to automatically reduce equity risk as you age.