Personal Investor: Bank of Canada keeps savers on the sidelines
The Bank of Canada hiked its benchmark interest rate today for the fourth time in 12 months. But at 1.5 per cent it’s still a long way from the 2.2 per cent annual inflation rate.
That means savers who want safety will have to suck it up for a while longer and keep remembering: the true function of fixed income is to act as a portfolio stabilizer against the unpredictable swings in equity markets.
And while savers are dreaming about double-digit bond yields, the best advice is to keep maturities short and ladder them over several time periods to seize on higher rates when they finally come.
It’s more important than ever to keep them short because the yield curve is flattening. That means the difference between long and short yields are narrowing. As an example, the three-year government of Canada bond yields two per cent, compared with a 30-year bond, which only yields 2.2 per cent. There’s little doubt rates are rising and investors do not want to be stuck in a low-yielding bond for a measly 20 basis points over a long period of time.
Guaranteed Investment Certificates (GICs) seem to be offering the best short-term yields. Some are as high as 2.8 per cent; not a fortune, but better than inflation.