Building a better ladder: GICs versus corporate bonds

Rising interest rates have been great for the street cred of the humble GIC.

Rising rates mean higher yields on guaranteed investment certificates – that’s one factor. Another is the negative effect that rising rates have on bond prices. Fearing that the bonds in their portfolio will dramatically lose value as rates move higher, some investors have been using GICs as a replacement. GICs hold their value no matter what’s happening with rates, with the offsetting disadvantage that they can’t easily be traded prior to maturity.

Are you better off with a ladder of individual bonds, or GICs? To find out, let’s look at a five-year ladder of corporate bonds and a similar ladder of GICs. Both were put together using the online inventory of one of the big online brokers.

The GIC Ladder:

• One year: BMO Mortgage Corp., yield is 2.25 per cent
• Two year: Manulife Bank, yield is 2.6 per cent
• Three year: B2B Bank, yield is 2.8 per cent
• Four year: Canadian Western Bank, yield is 2.95 per cent
• Five year: Laurentian Bank, yield is 3.1 per cent
• Average yield is 2.74 per cent

The Corporate Bond Ladder:

• The Hydro One 1.48-per-cent bond maturing Nov. 18, 2019: The price was $99.40 per $100 you invest, the yield was 1.9 per cent.
• The Canadian Natural Resources 2.05-per-cent bond maturing June 1, 2020: The price was $99.28 and the yield was 2.5 per cent.
• The Canadian Western Bank 2.8-per-cent bond maturing Sept. 14, 2021: The price was $99.92 and the yield was 2.8 per cent.
• The RioCan REIT 2.8-per-cent bond maturing Oct. 3, 2022: The price was $99.14 and the yield was 3.1 per cent.
• The Inter PipeLine 2.6-per-cent bond maturing Sept. 13, 2023: Price was $97.32, yield 3.2 per cent.
• Average yield is 2.7 per cent

A new notes:

• You can get better yields from GICs issued by alternative banks, trusts and credit unions that don’t have their products sold by third-party investment dealers. But that means you won’t benefit from the simplicity of having your GICs in the same place as the rest of your portfolio.
• It’s possible to squeeze a little extra yield from corporate bonds if you chose riskier issuers.
• The GICs all come from members of Canada Deposit Insurance Corp., which means combined principal and interest is protected up to $100,000; the bonds are all rated as investment grade, but not in the league of federal or provincial governments in terms of minimal default risk

Conclusion:

The GIC ladder wins if you want stability and you’re certain you’ll hold until maturity.