In the unpredictable landscape of investing, 2022 was a year where guaranteed investment certificates (GICs) looked like the undeniable champions for those seeking stability. With yields reaching an impressive 5% for terms ranging from one to five years, alternative banks made GICs an attractive option. In stark contrast, bonds suffered a significant setback, delivering an annual loss of 11.7%, considering both interest and price fluctuations. However, as we move through 2023, the narrative has shifted dramatically.

The Shift Towards Bonds

Today, bonds have emerged as a more favorable option than GICs for discerning investors. The major advantage lies in bonds' potential for capital gains—something GICs lack entirely. When the market is buzzing with volatility, the liquidity of bonds becomes a critical asset, allowing investors greater flexibility compared to the more rigid GICs, which can only be cashed out at lower yields.

Yield Comparison

Although GICs have enjoyed a yield advantage in recent times, this gap is narrowing. As of mid-March 2023, the benchmark FTSE Canada Universe Bond Index reflected a yield to maturity of approximately 3.3%. Some alternative banks offered marginally higher yields, reaching between 3.5% and 3.95% for similar terms. However, this advantage is no longer as compelling as it once was.

The Psychological Allure of GICs

The psychological allure of GICs stems from their stability; they don’t plummet in price during market upheaval. However, this lack of volatility has its downside—GICs won't appreciate in value like bonds, which stand to gain when interest rates decline. Current economic indicators hint at a likelihood of decreasing interest rates, especially in light of tariffs that threaten to slow economic growth. If rates drop, bonds could yield respectable total returns through a combination of price appreciation and interest income.

Economic Context

The narrative around rising rates, which spelled doom for bonds in 2022, seems outdated as economic powers grapple with potential downturns. While tariffs could increase consumer prices, the Bank of Canada appears hesitant to implement rate hikes that could harm economic recovery.

The Advantage of Liquidity

As a nervous investor, the liquidity advantage of bonds can offer you more control in a tumultuous market. If your bond investments rise as stock values fall, you might seize the opportunity to sell at a profit and reinvest in undervalued stocks.

Conclusion