Rob Carrick: Care to lock in today’s high interest rates for the next 10 years?

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No matter where you look, interest rates for savers and investors are kilometers behind the rate of inflation.

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The most recent inflation rate of 7 percent is compared to 3.3 percent for savings accounts, 4 to 5.18 percent for guaranteed investment certificates and 4 to 5.5 percent for corporate bonds maturing in five years. But inflation will fall at some point in the coming years, and so will interest rates. Today’s GIC rates and bond yields may look great in retrospect.

Care to lock in today’s rates for 10 years? I took a look around this week to see what’s on offer. In GIC-land, Motive Financial offered 5.1 per cent for 10 years, EQ Bank offered 4.7 per cent for two to 10 years and RBC offered 4 per cent. Note that Canada Deposit Insurance Corp. coverage applies to GICs of any term; It used to be limited to five years or less. In any case, a good number of GIC terms do not exceed five years.

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The selection is high in the world of investment-grade corporate bonds maturing in nine to 10 years. Here, you will get returns of 5 percent or more from blue-chip companies like banks, insurance companies and telcos. Some examples of some online brokerages with returns based on bond prices at the end of September:

  • Vine Canada: Matures on December 30, 2032, with a yield of 5.97 percent.
  • Brookfield Infrastructure: Matures September 1, 2032, with a yield of 5.5 percent.
  • CIBC: Matures on May 15, 2031 with a yield of 5.3 percent
  • Sun Life Financial: Maturing on May 10, 2032, with a yield of 5.1 percent.
  • Telus Corp.: Matured on November 15, 2032, with a yield of 5.4 percent.

If interest rates rise above current levels, the price of such long-term bonds will fall, and the decline will be worse than that of short- and medium-term bonds. For context, the FTSE Canada Long Term Bond Index was down 19 percent for the year as of the end of September.

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But when interest rates are stable and then decrease, longer-term bonds will most likely increase in price. There may be opportunities to sell them for capital gains at some future date. Or, you can keep them until maturity and enjoy a yield that will look better and better as inflation eases and rates come back down.

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Source: www.theglobeandmail.com

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