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Dale Jackson

Personal Finance Columnist, Payback Time


For long-suffering retirement savers, it might seem like a mirage. 

In response to Wednesday’s half-point rate hike by the Bank of Canada, Oaken Financial increased the annual yield on its five-year guaranteed investment certificate (GIC) to four per cent. Other issuers are close behind with many five-year payouts now north of 3.5 per cent.

Even shorter-term GICs are giving some love. Ratehub lists most one-year GIC yields well above two per cent, and as high as 2.8 per cent. Last year at this time, you were lucky to get one per cent. 

For Canadians saving for retirement, higher lending yields provide a safer way to reach return goals by shifting a larger portion of their portfolio assets from higher-risk equities to fixed income.

In more normal times — like three decades ago — the general rule of investing called for a fixed-income portfolio weighting roughly equal to the age of the investor. In other words, if you were 50 years old, half of your portfolio would be fixed income.

That went out the window starting in the 1990s when then-U.S. Federal Reserve Chairman Alan Greenspan made it his mission to keep rates as low as possible, for as long as possible.

Since then, the average retirement investor couldn’t attain their goals with a large portion of their savings earning less than two per cent each year. 

Like the proverbial frog in the pot of boiling water, they have had to inch up the risk ladder to generate income through equities like dividend stocks and real estate investment trusts (REITs). As a society, we have had to accept that our fortunes in retirement are closely linked to the whims of global equity markets.

Despite this week’s hike — the biggest in 22 years — the Bank of Canada’s benchmark rate is still only one per cent. Governor Tiff Macklem told Bloomberg News he expects it to linger between two and three per cent to achieve the central bank’s two per cent inflation target. That means if all goes well, fixed income yields will continue to climb.

Even as it stands, with the right portfolio mix of fixed income and equities, a four-per-cent payout on a GIC makes it much easier to hit annual return targets of six or seven per cent. After all, equities are expected to do the heavy lifting and fixed income is expected to act as a cushion when stock markets tank.

In the age of rock-bottom yields, the only option for investors wanting the safety of fixed income was to ladder short-term maturities and dream of the day when they could venture into higher-yielding longer terms. Joey Mack, head of fixed income with Toronto-based RF Securities Clearing LP, says that day has come.

“There’s no reason not to activate cash and buy bonds from two to 10 years here, especially investment-grade corporate bonds trading at a discount and yielding over 3.5 per cent,” he says.

That, of course, assumes central banks will be successful in getting inflation to target levels — and that assumes current supply-chain bottlenecks work themselves out, COVID-19 is under control, and the war in Ukraine doesn’t escalate.

There are concerns that inflation could slip out of the control of central bank monetary policy, and the return of the double-digit rates of the 1980s could wipe out gains from fixed income.

Joey Mack said he believes the Bank of Canada’s target inflation rate is attainable and a four-per-cent yield should keep well ahead of the cost of living.

If all goes well, happy days are here again for an entire generation that has never known the satisfaction and rewards from saving their hard-earned dollars.