Join Fund Library now and get free access to personalized features to help you manage your investments.
The Bank of Canada did what everyone expected last month and raised the overnight rate by 0.75%. It now sits at 3.25%, up three full percentage points since the start of the year. That’s the highest level since early 2008.
And it’s not over yet. In the statement accompanying the announcement, the Bank said the Governing Council “still judges that the policy interest rate will need to rise further.” How much further is anyone’s guess.
What’s clear is that the BoC’s governors are not impressed by the slight easing of inflation in July because it was narrowly based on gasoline prices.
“Inflation excluding gasoline increased and data indicate a further broadening of price pressures, particularly in services,” the statement said. “The Bank’s core measures of inflation continued to move up, ranging from 5% to 5.5% in July. Surveys suggest that short-term inflation expectations remain high. The longer this continues, the greater the risk that elevated inflation becomes entrenched.”
That’s as clear an indication as we can expect that the target rate will move even higher at the next announcement on Oct. 26.
The latest rate announcement, and the clear indication of more hikes to come, was bad news for bonds, which are already suffering their worst bear market since the early 1980s. As of Sept. 29, the FTSE Canadian Universe Bond Index was down 11.78% year to date. Government bonds fared even worse, losing 12.5%.
It's also bad news for the housing market, which has seen sales and prices fall since the Bank began raising rates earlier this year. Some economists are suggesting house values could drop 20% before this cycle is over.
Among the few beneficiaries are conservative investors who gravitate to low-risk guaranteed investment certificates (GICs). Their rates have been slowly moving higher, but it’s a case of two steps forward, one step back. The expectation was that GIC yields would rise after the latest move by the central bank. They didn’t, at least not across the board. Some five-year rates actually declined.
At the time of writing, the best rate on a one-year GIC was 4.65% from EQ Bank, according to ratehub.ca. Two small institutions, Achieva Financial and Steinbach Credit Union, are offering 5% on five-year terms. Most major banks are well below that, but there are some specials popping up. Right now, you can get a CIBC five-year GIC paying 4.75%.
If you want to look at other options, there are a few fixed income ETFs that are bucking the interest rate trend.
iShares 0-5 Years TIPS Bond Index ETF (TSX: XSTP) is a new ETF that invests in short-term U.S. Government inflation protected notes. They pay a low rate of return, but both the face value and the interest increase as inflation rises. This is a short-term ETF that invests in a portfolio of inflation protected bonds issued by the United States Treasury, which are known as TIPS. As of Aug. 31, the fund was showing a one-year rate of return of 3.5%. Year-to-date to Sept. 29 it is ahead 4.22%.
The key attraction of this ETF is safety. This is about as good as it gets if you’re looking for a bond fund in these inflationary times. You would get a better return from a GIC, but that involves locking in your money for a fixed period. This ETF offers flexibility – you can sell any time. Nothing is risk-free, but this comes close. The bonds it holds are issued by the U.S. Treasury. Nothing is safer than that. The securities in the portfolio mature within five years. The effective duration (a measure of risk) is 2.53 years.
The fund has only been in existence for slightly over a year (it was launched on July 6, 2021). Assets under management are $48.5 million. The management expense ratio is 0.16%. The fund makes monthly distributions, which can vary significantly. For example, the July payment was $0.408 per unit but that dropped to $0.164 in August. If you need steady income, this isn’t a good choice. Most of the distributions will be in the form of foreign income, which are fully taxable unless the units are held in a registered plan.
This fund is best suited for conservative investors who want some short-term inflation protection at minimal risk. The fund trades on the TSX but volume is very light – an average of only 1,821 units per day. Check with your advisor to make sure if fits with your portfolio allocation and objectives. And if you’re ready to trade, place a price limit on your offer and be patient.
Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website. To take advantage of a 50% saving on a trial subscription and receive the special report “The Tumultuous Twenties,” go to https://bit.ly/bwGP20s.
Follow Gordon Pape on Twitter at https://twitter.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney.
Notes and Disclaimer
Content © 2022 by Gordon Pape Enterprises. All rights reserved. Reprinted with permission. The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.
Join Fund Library now and get free access to personalized features to help you manage your investments.
Fund Library
