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Dale Jackson

Personal Finance Columnist, Payback Time


This week’s tamer-than-expected U.S. inflation numbers are the latest signal that massive interest rate hikes over the past year are working to cool the economy.

That’s a small relief for fixed income investors caught in the Catch 22 of reaping the benefits of higher yields as inflation eats away at their retirement savings.  

As an example, a one-year guaranteed investment certificate (GIC) currently pays about five per cent while the year-over-year inflation rate in Canada stands at 4.3 per cent. It’s a vast improvement from last year when inflation topped eight per cent as yields on GICs languished at one per cent.


Real returns aside, having a portion of retirement savings in fixed income is essential to balance overall portfolio risk against the volatility of equities. Any rate of return is welcome if stock markets tank when retirees need a reliable cash supply for living expenses.

In addition to hedging risk, fixed income investments can also generate tax savings in registered accounts such as a registered retirement savings plan (RRSP), tax-free savings account (TFSA), registered education savings plan (RESP) and the just-introduced first home savings account (FHSA). Fixed-income investments are fully taxed outside a registered account, in comparison.  

Retirement investors will generally hold fixed income to maturity, unlike professional bond traders who seek gains trading existing debt by taking advantage of short-term fluctuations in interest rates. 

There are strategies for retirement investors to maximize fixed income returns by staggering maturities to take advantage of the best going yields as often as possible. The most common strategy, known as laddering, ladders maturities over a fixed period of time.


There is no single set of rules when it comes to managing a fixed income portfolio for individuals. The portion of fixed income in the overall portfolio, the total duration of a ladder, and the types of fixed income investments depend on when and how the investor wants to retire.

That’s something a qualified investment advisor can help with. Hank Cunningham, fixed-income strategist with Toronto-based Odlum Brown Limited, has been trading in the bond market for over 50 years; a span that has seen the Bank of Canada benchmark interest rate range from 18 per cent to nearly zero. 

While major central banks have indicated the latest round of rate hikes is nearing an end, he is not ready to declare high inflation dead.

“I believe inflation remains a large threat and it will be difficult to see it come down below four per cent,” he says.

While some investors might be tempted by the higher yields offered in longer term maturities, Cunningham says he is maintaining short durations to a maximum of five years for his clients - at least until the dust settles.

His fixed income of choice includes a mix of government and high quality corporate bonds, government treasury bills and floating rate debentures. 

“The government bonds and t-bills give us the ability to move quickly to change our stance if we so deem,” he says.

In this environment, he says a good fixed-income strategy for a retail investment portfolio should reap annual returns between five per cent and seven per cent.

In the meantime, the looming threat of inflation leaves to door open for central banks to resume raising interest rates.

“Inflation is the enemy of fixed rate investments and today’s yields do not compensate investors for the erosion of their principal,” says Cunningham.