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GIC Maturing

Brotherman

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Jan 17, 2004
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I have a GIC that's maturing in 2 weeks. What should I do? I'm looking around at different banks and my god, the interest rates are terrible.
I"m a conversative type of investor, which is why I like GIC's. It seems the going 5-year rate for a GIC is 3%. That's too low in my opinion. I want the same deal I had before with my bank, which was 3.75% for 18 months.

Any advice?
 

oil&gas

Well-known member
Apr 16, 2002
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Ghawar
I have a GIC that's maturing in 2 weeks. What should I do? I'm looking around at different banks and my god, the interest rates are terrible.
I"m a conversative type of investor, which is why I like GIC's. It seems the going 5-year rate for a GIC is 3%. That's too low in my opinion. I want the same deal I had before with my bank, which was 3.75% for 18 months.

Any advice?
You may consider buying into short to medium term debt issues with
good rating. As a rule the higher the yield the riskier the underlying business
of the issuer. Nevertheless you may still get a significantly better yield than 3% even
with bonds of blue chip corporations like Hydro One, Encana, Rogers etc.

Some people may suggest bond ETFs tracking various indexes as an
alternative. My understanding is that as a bond holder you can always get
your money back if you hold the bond to its maturity. ETF may carry derivative
risks and depending on your point of entry you could lose money. Of course
the risk of the bond issuer going bankrupt is always there. But then the
bank selling your GIC could too.

To me bond investing requires more expertise than stock trading. Instead
of buying individual bonds I would rather buy a bond fund.
 

euripides

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Oct 28, 2006
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the risk of the bond issuer going bankrupt is always there. But then the
bank selling your GIC could too.

To me bond investing requires more expertise than stock trading. Instead
of buying individual bonds I would rather buy a bond fund.
Good luck finding a decent bond fund paying more than 3 %.
GIC's, while low on interest, are generally insured by CDIC. The risk of getting another 50 basis points with some corporate bonds is probably unrealistic.
Wait a year or two and rates may start going through the roof. Ladder your funds over 5 years with GIC's and each year you will have funds to re-invest, hopefully at higher rates.
 

hinz

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Nov 27, 2006
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I want the same deal I had before with my bank, which was 3.75% for 18 months.

Any advice?
My advice is forget about it, given almost zero interest rate environment. Only Bernie Madoff/Earl Jones of the world could promise the same deal.

To add insult to injury, you will be taxed to your marginal tax rate if the GIC is outside RRSP and/or TFSA.

You may get 3.75% for 5 years if you have six figures or more.

You could take a look at Ally Bank but you are lured by relatively high interest rate to bail out GMAC banking unit. That's on top of huge bailout from TARP. :rolleyes:
 

hinz

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Nov 27, 2006
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Some people may suggest bond ETFs tracking various indexes as an
alternative. My understanding is that as a bond holder you can always get
your money back if you hold the bond to its maturity. ETF may carry derivative
risks and depending on your point of entry you could lose money. Of course
the risk of the bond issuer going bankrupt is always there. But then the
bank selling your GIC could too.

To me bond investing requires more expertise than stock trading. Instead
of buying individual bonds I would rather buy a bond fund.
I think you miss tracking error when you mention the downside of holding Bond ETFs.

You could lose money for actively managed/passively index bond mutual funds and passive bond ETF when your point of entry is not "perfect". For those who try to trade Bond ETFs frequently, the commissions you pay for buying and selling are essentially FE and DSC in mutual fund speaks.

Buying individual bonds could be an option but the face value for each bond is if I could recall 4 to 5 figures. Unless you have $250K of investible cash or more reserved for fixed income component, otherwise laddering and diversification are luxury for the majority of retail investors.

If you are inclined to invest in bond mutual funds, you could take a look at lower cost, no load, high consistent return fund like PH&N Short Term Bond (MER 0.63%) but you need $25K min for initial investment. You would be better off to use the same $25K to invest in the index bond mutual funds at the big banks (MER around 0.5% or less), assuming you are doing DCA monthly going forward but the choice if I could recall is restricted to medium to long term bonds index.

By comparison you get better preposition by investing in XSB due to liquidity and low cost (MER 0.25%) albeit not as rock bottom compared to BSV (MER 0.1%)
 

oil&gas

Well-known member
Apr 16, 2002
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Ghawar
Here is Gordon Pape's recent
outlook on interest rate for
2010. Hope it may help.

----------------------------------------------------------------
For the past couple of years, interest rates have not been a major factor
in investment decisions. Central banks around the world pushed them to
historic lows in an effort to stave off a total financial and economic
collapse and, for the most part, they have remained at those levels.

This will be the year when everything changes. Already a few countries,
led by Australia, have started the process of moving rates higher. Last
Thursday, China sent tremors through financial markets by modestly
raising the yield on its three-month government bills (the equivalent
of Treasury bills in this country). Some analysts dismissed it as
a technical move but others interpreted as a signal that the Bank of
China is preparing to raise its benchmark lending rate in an effort to
cool growing inflation. Whatever the reason, the result was a big drop
in Chinese stocks and a weakening in key commodity prices.

Make no mistake: there is more news of this type coming. As the global
economy recovers, central banks are going to begin to move away from the
current low rate environment. That will have an effect on bond prices,
the stock market, consumer credit, house sales, corporate financing, and
just about anything else you can think of that is associated with money.

The magnitude of the impact will depend in large part on the pace at
which the central banks move. Bank of Canada Governor Mark Carney is
on record as saying that the target overnight rate will remain at 0.25
per cent until the end of the second quarter barring a dramatic shift
in the economic climate. After that, nothing is certain.

The first rate-setting after June 30 is will take place on July 20 with
the next one due on Sept. 8. In an interest rate forecast released last
week, RBC Capital Markets predicts we will see the overnight rate at
0.75 per cent by the end of September, an increase of 50 basis points
(bp). Unless inflation emerges as a serious concern in the interim the
Bank will probably choose to implement two quarter-point hikes to ease the
shock to the financial system – assuming the RBC forecast is on target.

By the end of 2010, RBC predicts the target overnight rate will be at 1.25
per cent, which implies another 50 bp increase in the fourth quarter. Of
course, that would mean that interest rates across the board would rise
on everything from Treasury bill yields to mortgage rates.

RBC's outlook is more aggressive than the prediction I made last week when
I suggested rates could rise more slowly than generally expected because
of low inflation, the strong loonie, and consumer credit risk. I said
I expected the target overnight rate to be at 1 per cent or possibly
lower at the end of 2010. But the reality is that no one can predict
with any degree of confidence how fast rates will move up. We know they
are going higher; that's inevitable. But the pace of change will depend
on a range of variables, starting with the strength of the economic
recovery. Employment figures, which were disappointing in December,
will be an important consideration.

The real shocker in the RBC forecast was the prediction for 2011. They
expect to see very aggressive rate increases in the first half of
the year for both Canada and the U.S. RBC predicts hikes of 75 bp
in Canada in both the first and second quarters of the year followed
by an increase of 50 bp in the third quarter and 25 bp in the fourth
quarter. By year-end 2011, the forecast is for the target overnight rate
to be at 3.5 per cent. That would imply a Prime Rate of 5.5 per cent,
double the current rate of 2.25 per cent. The last time Prime was that
high was in the first quarter of 2008.

The RBC forecast for the U.S. is intriguing in the light of the company's
predictions for Canada. They think the Federal Reserve Board will move
much more slowly than the Bank of Canada, with the fed funds rate only
reaching 0.75 per cent by the end of 2010. That would mean a difference
of 50 bp between the Canadian and U.S. rates, which would almost certainly
put more upward pressure on the loonie.

In 2011, RBC sees the Fed becoming much more aggressive with hikes of
50 bp in the first quarter, 75 bp in the second, 50 bp in the third,
and another 75 bp in the fourth. By year-end 2011, RBC sees the fed
funds rate at 3.25 per cent, which would be a quarter-point lower than
the Bank of Canada.

There are numerous implications for investors and consumers in a rising
interest rate scenario, regardless of how the numbers actually work
out. They include:

1. Avoid locking in for the long-term. Many people will be making deposits
to Tax-Free Savings Accounts (TFSAs) and RRSPs this month. Do not, under
any circumstances, put money into GICs with maturities any longer than
one year. GIC rates a year from now will likely be at least half a point
to a full point more than you'll get today. Two years down the road,
you could be looking at rates that are two percentage points or more
above those currently offered.

2. Avoid long-term bonds, particularly government issues. They will
decline in price as interest rates rise. The one possible exception is
real return bonds, which should perform well if inflation does ramp up
to the 2 per cent range or beyond.

3. Be prepared for stock market volatility as interest rates start to
move higher. As yields rise on lower-risk securities such as bonds and
GICs, they will become more attractive to conservative investors.

4. Mortgage rates are likely to rise in 2010 and the upward
momentum will escalate in 2011 if the RBC forecasts are anywhere near
correct. Homeowners who are stretched thin financially should considering
locking in at today's rates.

5. Floating rate preferreds will perform well in a rising rate environment
as their dividends will increase. Ask your financial advisor for
recommendations.

6. If the Bank of Canada is as aggressive as RBC predicts, the loonie
should be even stronger than expected. That will depress gains from
U.S. stocks for Canadian investors which means we'll need to be very
selective in our choices from Wall Street.

Again, I want to stress that there is no magic formula for predicting
interest rate movements. The RBC forecast, like all others, is based
on careful research and analysis but there are so many unknowns in the
equation that we could see dramatic changes from one quarter to the next.

The only thing we can say with reasonable certainty is that rates will
go higher. We need to start preparing now.
 

hinz

New member
Nov 27, 2006
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Here is Gordon Pape's recent
outlook on interest rate for
2010. Hope it may help.
Ah Gordon Pape, he seems to look "trustworthy" and not "condescending" like some "CFAs/financial guru/celebrities" at BNN/ CNBC/ Bloomberg. His advices have more credibility and common sense given the fact that he passed CSC only.

BTW, Gordon Pape seems to advocate stock picking nowadays and I get the feeling he stops being a pitch man on actively traded mutual funds that he used to associate with a decade ago when he wrote annual mutual funds guide. That alone makes you wonder why people are still taking the suggestion from the advisers of all stripes to invest in mutual funds and their deriatives such as target dated funds/wrap accounts with fancy names.:rolleyes:
 

Grafton

New member
Sep 29, 2009
295
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Ah Gordon Pape, he seems to look "trustworthy" and not "condescending" like some "CFAs/financial guru/celebrities" at BNN/ CNBC/ Bloomberg. His advices have more credibility and common sense given the fact that he passed CSC only.

BTW, Gordon Pape seems to advocate stock picking nowadays and I get the feeling he stops being a pitch man on actively traded mutual funds that he used to associate with a decade ago when he wrote annual mutual funds guide. That alone makes you wonder why people are still taking the suggestion from the advisers of all stripes to invest in mutual funds and their deriatives such as target dated funds/wrap accounts with fancy names.:rolleyes:
Hinz I've been reading through a few financial threads and I'm very impressed with your financial knowledge. Although you're a DIYer you probably know more then at least 95% of the financial advisors out there. I really appreciate your ETF suggestions especially.
 

hinz

New member
Nov 27, 2006
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Hinz I've been reading through a few financial threads and I'm very impressed with your financial knowledge. Although you're a DIYer you probably know more then at least 95% of the financial advisors out there. I really appreciate your ETF suggestions especially.
Just try my best (not try my breast) to protect my hard earned after tax dollars by keeping myself knowledgable all the time on these issues. A little bit of trial and error at young age in the stock market/casinos do help to be realistic.

It's just like doing diligent work here to assess who's the real deal or bait and switch or overrated/hyped among the SP/MPAs here. :eek:
 

oil&gas

Well-known member
Apr 16, 2002
12,221
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Ghawar
Rob Carrick's recent report on bond investing

This recent article by Rob Carrick's from globeandmail could be
a useful source of information to those interested in bonds.

--------------------------------------------------------------------------------------------
Do the right thing: Own bonds.

Even with interest rates expected to rise this year and next?

Of course. Sensible portfolio construction is based on your personal needs
and risk tolerance, not interest rate forecasts. You don't have to be a
passive victim of rising rates, though. There are several measures you
can take to help the bond side of your portfolio survive rising rates
with a minimum of damage.

First, a quick review of bond market basics. The price of bonds and
bond funds goes down when interest rates rise, and vice versa. If you
own individual bonds, you'll see some price decreases in your account
statements that will distract you from the fact that you'll still get
your money back when the bonds mature. If you own bond mutual funds or
exchange-traded funds, then price decreases can only be reversed when
interest rates fall again.

There are rate increase skeptics out there who think the economy won't
soon recover to a level where higher borrowing costs are needed to
stave off inflation. In that case, there's an argument for avoiding
bonds because the returns of the moment are so low. But either way -
rising rates or steady rates - you need bonds.

"We recommend having a portion of a portfolio in bonds, even if they're
not expected to do well," said Warren MacKenzie, president of the advisory
firm Weigh House Investor Services. "You have to protect your capital, and
bonds will do better than the stock market if we have another downturn."

There are questions about when interest rates will move higher, but it's
a done deal they will rise at some point from today's historically low
levels. Let's look at how to get your portfolio ready.

François Bourdon, manager of the Horizons AlphaPro Fiera Tactical Bond
Fund, has been preparing for higher rates by moving into shorter-term
bonds. A key rule for bonds in a rising rate world: Short term bonds
hold up better than long term bonds. Put a little more bluntly, they
will fall less in price.

Mr. Bourdon said the average duration of his portfolio - that's the
time required for the bonds to repay the cost of buying them - has been
shortened to four or 4.5 years over the past six months from six years.

"The idea is that as interest rates move up, we will not suffer as much,"
Mr. Bourdon said.

If you're investing in bond mutual funds, you can find the duration using
the Morningstar.ca website (see chart). For bond exchange-traded funds,
consult ETF company websites. Mr. Bourdon said a good rule of thumb
for duration in a time of rising rates is to keep it between three and
five years.

With an average weighted duration of three years, a one-percentage-point
increase in rates would cause a bond fund to fall three percentage
points in value. However, the interest payments from the fund would
likely offset that loss and leave you flat. "If this happens in a good
economic environment, your stocks will make up for it," Mr. Bourdon said.

Horizons AlphaPro Fiera Tactical Bond (HAF.UN-TSX) is a closed-end
fund with about 40 per cent of its assets invested in corporate
bonds through an ETF called the iShares CDN Corporate Bond Index Fund
(XCB-TSX). Closed-end funds and exchange-traded funds both trade like
stocks - they differ in that the former employs a manager to pick bonds
or stocks while the latter is primarily a tool for tracking stock and
bond indexes.

Government bonds are the most vulnerable to rising rates, but Mr. Bourdon
said corporate bonds will fall in price, too. That's why he'll be paring
down his exposure to them to something like 35 per cent of the portfolio
and putting the proceeds into a short-term bond ETF called the iShares
CDN Short Bond Index Fund (XSB-TSX).

Why keep such a big portion in the corporate bond ETF? Mr. Bourdon
explains that corporate bonds offer higher yields than government bonds
(with more risk), the duration of XCB is reasonable at 5.3 years and
the holdings are diversified across 348 different bond issues. Also,
the outlook for corporate bonds is tied in part to the health of the
economy, and rising rates suggest a robust level of health.

Mr. Bourdon also plans to reduce his holdings in an NYSE-listed ETF
that holds high-yield bonds - the iShares iBoxx $ High Yield Corporate
Bond Fund (HYG). The outlook for high-yield bonds is even more tied
to the economy than corporate bonds, so rising rates aren't the issue
here. Rather, it's that high-yield bonds have surged in price over the
past year and warrant some profit-taking.

Views on holding corporate bonds differ widely among advisers. Weigh
House's Mr. MacKenzie thinks high-quality corporate bonds should account
for about 25 per cent of an investor's overall bond holdings. He estimates
the benefit to be an extra 0.5 to one percentage point of yield.

Calgary-based investment adviser Kevin Cork avoids corporate bonds
and their riskier but higher-paying cousins, high-yield bonds. "The
returns on them can be tremendous," he said. "But for a lot of people,
they require an extra layer of understanding and risk tolerance."

For an investor with a 50-50 split between stocks and bonds, Mr. Cork
said he'd put 30 per cent of the bond holdings in a diversified bond
mutual fund, 10 per cent in a money market fund and the final 10 per
cent in a real-return bond fund.

The diversified bond fund is all about having an investing professional
navigate the rate landscape for you, the money market fund is about
keeping money safe (at the expense of returns) and the real return
bond fund is to provide portfolio protection if inflation jumps. For
"extra nervous" clients, Mr. Cork might use a short-term bond fund or
a mortgage fund instead of a regular bond fund.

An alternative to short-term bond funds is to build a ladder of bonds
or guaranteed investment certificates. That means equally dividing your
investments into GICs with maturities of one through five years. Last
week's Portfolio Strategy was all about using GICs as a replacement for
bond funds, and you can read it at http://tgam.ca/GfP.

Warning: Rising rates will make it uncomfortable to own bonds and bond
funds. So prepare as best you can and remember that not having bonds
puts you first in line to get hit if the stock market blows up again.

****

Gauging the downside risk of bond funds

Look for the weighted average duration of your fund, which is the
time needed to recoup the cost of buying the bonds in the fund's
portfolio. Here's how to find out about duration:

Bond mutual funds:

Go to: morningstar.ca/globalhome/industry/FundCompare.asp


Bond exchange-traded funds:

Go to ishares.ca, claymoreinvestments.ca, bmoetfs.com or hapetfs.com

Look up bond ETF profiles to find duration information

****

Playing defence with bonds

With an eye toward rising interest rates, we asked a couple of investment
advisers how they would

structure the bond side of a client's portfolio. The target investor
here is someone who is reasonably conservative and has a portfolio evenly
split between stocks and bonds.

Using Mutual Funds The 30-10-10 Mix
Suggested by Calgary investment adviser Kevin Cork

30% of the portfolio: A diversified bond fund
Mr. Cork uses: TD Canadian Bond, Trimark Canadian Bond, PH&N Bond,
Fidelity Canadian Bond


10% A real-return bond fund
Mr. Cork uses: TD Real Return Bond, Mackenzie Sentinel Real
Return Bond


10% A money market fund
Mr. Cork uses a variety of funds in this category: low fees
are key.



Using Exchange-Traded Funds The 20-20-10 Mix
Suggested by Warren MacKenzie of Weigh House Investor Services

20% of the portfolio iShares CDN Bond Index Fund (XBB-TSX)


20% Claymore 1-5 Year Laddered Corporate Bond ETF (CBO-TSX)


10% iShares CDN Real Return Bond Index Fund (XRB-TSX)
 

Grafton

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Sep 29, 2009
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Oil and Gas thanks for posting that article. IMHO, Rob Carrick and Jonathan Chevreau of the National Post are my two favorite financial writers. One of the best books that I've ever read on bonds is called In Your Best Interest by Hank Cunningham. Cunningham has over 40 years experience in the fixed income markets and appears on BNN all the time.

The best thing about this book IMHO is that Cunningham actually reveals the typical markups on individual bonds and how much advisors actually get paid for selling clients individual bonds. Cunningham also hates bond mutual funds of any type and believes mostly in individual bond laddering. However Cunningham does think that bond ETFS are also an acceptable way to invest in bonds as well. I would highly recommend this book.
 

Brotherman

Active member
Jan 17, 2004
1,156
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38
Update

So i go to the bank today and the my advisor recommended fixed income investments. How are safe are they? Since im a conversative type of investor, I don't like the risk part, which is why I stick with GIC's. Right now I have my money in a TFSA cash portion paying 2%.

I've looked at ally bank and there highest yield is 3.60% for a 5-year term GIC. That's not bad, but however I don't want to stay in the locked in for 5 years because I know the bank of canada will be raise interest rates, some predict by the end of the year.
 

hinz

New member
Nov 27, 2006
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So i go to the bank today and the my advisor recommended fixed income investments. How are safe are they? Since im a conversative type of investor, I don't like the risk part, which is why I stick with GIC's. Right now I have my money in a TFSA cash portion paying 2%.
Nothing is safe.

I suspect your financial advisor at the branch recommends you actively trade bond mutual funds manufactured by in-house specialists. It is doubtful he or she recommends individual bonds since the par value is high and available to banks brokerage only.

These are not "fixed" since it's a basket of bonds managed by the CFAs. There are no maturity dates to get the money back and you can have capital loss when the unit price fluctuate. The performance is also capped due to low interest environment and relative high MERs.

You could ask your adviser or do your research on the bank website to see whether the in-house index bond mutual fund is available. You don't get the certainty but you get better chance to match the benchmark. Those products are not promoted at the branch unless you ask.

As far as having TFSA cash portion is concern, IMHO it's prudent move for now and you could wait until the interest rate rises and start to invest short term bonds ETF or index Bond mutual funds incrementally, not in a lump sum.

I've looked at ally bank and there highest yield is 3.60% for a 5-year term GIC. That's not bad, but however I don't want to stay in the locked in for 5 years because I know the bank of canada will be raise interest rates, some predict by the end of the year.
You could not have all (high rate, liquid and low/no risk) in the current environment. It's anybody guess but it's always prudent to have liquid cash flow for now, probably this year.
 
Ashley Madison
Toronto Escorts