However, his video sparked some discussion in Ben Felix’s Rational Reminder community (login required). Felix is a consultant at PWL Capital. In an email to me, Felix wrote that the 121-year historical real yield on long-dated government bonds in Canada and the US was around 2% but includes corporate bonds, currently stands at 3.26% and breakeven inflation is 1, 86%.”
That looks completely normal, says Felix. “The market priced in rate hikes long before the BoC [Bank of Canada] hiked. On the day of the BoC announcement, bond yields were positive. All of these articles about bond deaths came out after prices fell. When prices fall, expected returns rise. When an asset class has been declared dead, it’s probably a good time to invest in it.”
Still, Matthew Ardrey, wealth manager at Toronto-based TriDelta Financial, says he “partially agrees with the theory that bonds are dead.” He adds: “Bonds face dual headwinds from both rate hikes and inflation. This drives the prices of existing bonds down and makes their real yield negative… It’s certainly a challenge to find value in bonds.”
Ardrey continues to see a critical need for bonds for liquidity as well as offsetting equity volatility. “I concentrated on the short end of the corner. Shorter maturities have less of an impact on rate hikes. Also, corporate bonds have outperformed government bonds.”
Ardrey worries that what was once considered “risk-free,” or at least low-risk, is now considered a riskier asset class. “But again, where is an investor going these days who is really low risk? Cash is being eroded by inflation, equities are volatile and alternatives have liquidity risk.”
Let’s turn to the GICs
I would argue that the humble Guaranteed Investment Certificate (GIC) is the place to be. At Pape globe In the article linked above, he added a key criterion: those looking for a safe haven could park funds in 1-year GICs. I did this myself when my previous GIC ladders were due. Following the advice of my own fee-paying financial planner, I was using 2-year GICs until last year, but it’s now clear that with several rate hikes still to come in 2022, it would be nice to be able to reinvest at higher rates a year from now. One-year GICs offer flexibility without creating the red ink that long-dated bond ETFs cause these days.
One does not have to wager all the GIC bound cash at once. One could add new GICs every two or three months, thereby benefiting from higher rates throughout the year as further increases are implemented. Then, when the uniformly spaced GICs mature, cash inflows are available for reinvestment at (hopefully) higher interest rates. Alternatively, you can park in 90- or 180-day T-Bills (Treasury bills) and collect a modest amount of interest while you wait for the next hike cycle.
The Bank of Canada hiked interest rates by 50 basis points on April 13, the day I began writing this column. It’s best to wait a full week for such rate hikes to be reflected in the revised GIC rates, but even on April 19, I found a handful of 1-year GICs on RBC Direct Investing that were 2.7% or more paid:
