Length of gic term | GIC discussions | Discussion forum

Short answer: nobody knows, and your best bet most of the time is to create a ladder which will help you average things out with subsequent renewals. 2.43 is indeed better than 1.72!

Longer answer: there seems to be some consensus in the media etc that rates will gently rise over the next while, presumably years. However, the puny rises we have seen this year were forecast for many years before they actually happened and there is no guarantee they will continue without any bumps. They also say that rates are not going to improve dramatically.
With the current unpredictability in the US, our economy is vulnerable so that it is harder than ever to foresee the future. The Bank of Canada is moving rates up gingerly but is aware of the "wild card" in the US which could throw things off.
I am not familiar with the offerings through the brokerages. Perhaps they sometimes offer "specials" as well?
You might improve your odds somewhat by waiting until January as there are often special offers in January and February - "RSP season".

If you are young and are making significant annual contributions, you could consider putting your next contribution somewhere else, but I can appreciate the desire to keep it all together.

If it were me, I would wait until January and see what is on offer then as it's not very far away. I would work towards having a ladder and bite the bullet on the rates.

Balancing act...5 years is too long when forecasts are for a gradual rise in rates and 1 year rates are too low. I went with a 3 year ladder at Motive @ 2.65% and 2.95 for a five year if you're so inclined. You can always convert to a 5 year ladder as your GICs mature if/when rates go up.

Sosmetimes a little hindsight is useful.
A year ago last summer, I bought a five year GIC at 2.75 . At that time, it was felt that rates were likely to go up in the not too distant future. A lot of people thought it was best to stay out of the five year market, and many people preferred one year for that reason. I hedged my bets a bit and also had some one-year cashables as well, just in case rates went up faster than anticipated, but that probably wasn't necessary.

It's now over a year later, and five year rates are still around 2.75 . (The best deal this year by far was when you could briefly get 3.5 at Oaken, but that was due to unusual circumstances.) Now, you can get 2.8, and sometimes 2.9 . The difference is not huge.

If I'd bought one-years in 2016 in anticipation of rising rates, I would have lost out on that extra 1% for at least a year, and I'd still be asking the same question this year and might decide to put in another year at 1.7ish.

If rates continue to move very slowly, as is expected, you could end up asking the same question for the next five years (or more) and always getting a low rate. With a GIC ladder, and/or new annual contributions, you can still reconsider annually if you wish, but you only have to re-evaluate a portion of your portfolio at a time.

FWIW, I wouldn't touch bonds or bond funds right now either.
Bond funds tend to go down in value when interest rates rise, and I am surprised AltaRed would recommend them.
Bonds can be useful for extending your ladder to 10 years, or even longer in some cases, but this is more useful when rates are higher. We had some long provincial bonds at about 15% once, and held them to maturity. They were a good investment, but I wouldn't touch it today. If it hadn't been for the self-interested broker we had at the time, who discouraged us, we would have bought more and done even better. Suffice it to say that we didn't know then what we know now!

3 year or 5 year ladder is up for grabs, I guess. The five-year GIC that I bought last year at 2.75 only has four years left now. So far, I'm ahead.

Another thing to consider is the possibility of another recession. It's been 10 years since the last one started, and rates have not recovered yet. If another recession comes along, today's rates will look terrific by comparison.

Thanks for the explanation.

I think I get what you're saying but I still wouldn't do it, personally. I like to know what I'm getting when I buy in. I'll deal with my options when the GICs mature. The point of "fixed income" part of portfolio is to get a fixed, i.e. predictable, income. A GIC or actual bond is the best way to get that. "Wait and see" is better suited to other expectations.

A lot of people don't realize that you can actually lose money on bond funds, just like any other fund. Gordon Pape wrote an article about this in the Globe recently, but i didn't read it as I don't subscribe. I believe it referred specifically to short bond funds.

I read Gordon Pape's October 12, 2017 Globe & Mail article A warning: Short-term bond funds are not loss-proof. In addition to not being loss-proof, the short-term bond funds don't hold their bonds to maturity!

Gordon Pape asked Blackrock (sponsor of XSB) and BMO Global Asset Management (sponsor of ZCS). The two funds responded that they sell when the bonds are within one year of maturity. That explains why XSB currently has only 0.03% of its value with 0 - 1 year maturity.

To say that one should be looking at a long horizon (10-15 yrs) for a short term bond fund, and to hold that as being superior to 5yr GICs, makes no sense to me. In addition, GIC ladders provide annual access to undiminished capital. It's apples and oranges.

Having to hang on for 10-15 years makes it no different from any kind of fund (but with lower expectations than most), and that is what the investor is trying to offset with their GICs.

AltaRed, you have twice made the accusation that bond funds are being "denigrated" here. There is a significant difference between denigration and critical evaluation.

The size of a fund says nothing about its appropriateness for anyone in particular. There are people who have invested in every kind of fund under the sun, some to their regret.

You suggest that bond funds are appropriate for people who can't or don't want to manage GIC ladders. You also say that bond funds are "complicated", indeed "too complicated to go into here", and that people who hold bond funds have to be very careful about when they cash them in. Yet you think "most people" would be better off with bond fund than GIC ladder.
This analysis makes no sense to me. Nobody should invest in anything they don't understand. The risk of bad timing in selling a bond fund seems far greater than potential confusion over GIC ladders. (I, for one, can't even understand what you are suggesting in that regard, but I find GIC ladders very easy to understand and follow.)

I conclude that "most people" would in fact be better off with GIC ladders, where they can never lose money unless there is a bankruptcy and they are over the insured limit, and they clearly know when the money will be cashed in. Further, it is wrong to assume that most people have significant other assets to draw on for withdrawals. It is precisely the people who don't have a lot of money and/or don't have these other assets who would be most vulnerable to the weaknesses of bond funds. The only advantage I can see for such people is that they could, theoretically, sell their bond fund at any time in order to get access to their capital, although with some risk that timing would be wrong. Even so, in a crisis, GIC holders can borrow against their GIC if necessary. I can't say for sure but I doubt they could borrow against a bond fund as bankers know those are not secure. In today's climate, i think those people would be better off with a high interest savings account in the 2.5 range - at least for the present - if they are concerned about needing access to their capital. This would also be important for people who plan to use their RSP as part of a down payment.

Bond funds may be complicated, but the fundamental thing that everyone who considers them needs to know is that their value fluctuates. This is true of all funds. They all have a risk that you could lose money if your timing is wrong.

For people who have lots of money and diverse assets, and no time or interest in managing them, these funds may make sense as a fixed income solution. They won't miss the basis points that they lost out on, they are not at risk of having to cash them at the wrong time, and they will never be strapped for income. However, this does not describe the majority of Canadians.

OP has, I think wisely, decided that he/she doesn't understand bond funds and is better off with GICs.

I am primarily looking at 2-4 year GIC rates, though I would consider a 5-year GIC rate at or above 2.5%, based on my updated forecast as I see the BoC again resuming its dovish stance to raising rates. So, we could even see HISA and/or GIC rates drop again. 🙂

Cheers,
Doug