Personal Investor: Poloz delivers vindication for savers
For debt-burdened Canadian households, it’s a moment of retribution. For savers it’s vindication.
Bank of Canada Governor Stephen Poloz increased the benchmark borrowing rate for the fifth time since the central bank began raising rates last year. The increase of a quarter percentage point only brings the overnight rate to 1.75 per cent, but with an expected three further rate hikes by the end of next year, it is could rest at 2.5 per cent.
That’s still below historic levels but for investors who maintain a fixed income weighting to balance out the equity risk in their portfolios, it’s a glimpse of the promised land. For the past decade, savers wanting a guaranteed income stream have had little choice but to ladder their fixed income portfolios with short-term debt – usually one-year guaranteed investment certificates (GICs).
According to the latest posting from Rate Hub, the best one-year GIC currently pays out 2.9 per cent. If the Bank of Canada hikes as expected over the next year GIC rates should advance to about 3.5 per cent in 2019. That allows investors to rely less on the equity portion of their portfolios for returns. That means less overall risk to reach their retirement goals. As an example, an investor targeting annual returns of six per cent can demand less from stocks because bonds will do more of the heavy lifting.
Corporate bonds tend to generate higher yields but in many cases still fall below corporate stock dividend yields when you factor in the potential for capital growth.
By laddering short-term debt, investors have more frequent opportunities to get the best going rates in a rising rate environment. The big question for savers remains on how long it will take for long-term debt yields to rise.
A Government of Canada 10-year bond currently yields a paltry 2.44 per cent. A proper reward for investors who lend over the long term should be the next step in total vindication.