The latest U.S. CPI (inflation) report showed preliminary signs of decelerating price growth and, as a result, bond yields have declined. Since the report, the Government of Canada 10 year yield decreased from roughly 3.60% to 3.02% and the 5-year from about 3.75% to 3.27% (Figure 1).
Figure 1 - GOC 5 Year Yield (blue) and GOC 10 Year Yield (gray)
Source: FactSet
GIC rates, on the other hand, have remained fairly unchanged and still yield over 5%. As a result, the gap (spread) between GICs and government bonds has widened to historically high levels near 2% (Figure 2). Unless interest rates are heading meaningfully higher from here, GICs could be a timely purchase for those seeking safe, government-guaranteed income.
Figure 2 - 5 Year GIC Yields vs. 5 Year Government of Canada Yields
Corporate bond yields also fell following the inflation report but we still see value in the space. Below are a number of issues highlighting the opportunities available for investors seeking income. All of these bonds trade below par and, if held to maturity ($100), their returns will come from a combination of capital gains and interest income. For non-registered accounts (outside TFSAs & RSPs), this feature makes them more tax efficient than bonds trading at/above par or GICs that only return interest (interest is taxed at a higher rate than capital gains). The taxable equivalent yield column shows the yield an investor would need to receive on a GIC to achieve the same after-tax return as the corresponding bond.
Figure 3 – Corporate Bond Ladder
