# Possible interest rate hike and GIC rates



## gibor365 (Apr 1, 2011)

Last couple of weeks there are a lot of talking about interest rate hike (in Canada). I was expecting GIC rates to go up, however it doesn't happen, on the opposite , they are decreasing... Month ago (when nobody was talking about rate hike) I bought 2 year monthly GIC with 1.96% rate, now, the same GIC offers 1.01% or so...
Don't bank believe in interest hike or what?


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## NorthernRaven (Aug 4, 2010)

GIC rates, even for a single institution, aren't slavishly tied to the BoC rate. A company may tweak them to produce more (or less) demand for various terms, or when they need more (or less) financing, or as a temporary "sale" to increase market share. The big banks especially aren't going to have high base rates, and you may have got some sort of temporary special pricing on your two-year, which has since reverted to normal.


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## gibor365 (Apr 1, 2011)

> The big banks especially aren't going to have high base rates


 Not only big banks....I'm checking 3rd party rates in CIBC IE for different fin institutions


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## Belperifs (Jul 8, 2017)

Not sure you can do anymore than have a half closed eye on interest rate hikes. The "experts" were saying they were definitely going up 5 years ago, and 4 years ago and 3 years ago....


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## james4beach (Nov 15, 2012)

I agree, it's hard to predict interest rates. And GIC rates are sluggish to move even when market rates move. A rate hike is not certain. The only thing that's certain is that bond prices have gone down (yields are up).

gibor, perhaps you might be interested in adding some XSH to your portfolio? (This would have to go in a TFSA because it's not tax efficient). XSH has a yield to maturity now of 2.25%, less 0.13% MER = *2.12% yield* for short term corp bonds.

XSH is more liquid than GICs, but less safe.


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## tygrus (Mar 13, 2012)

I just saw that RBC is offering 2% in HISA. So things must be coming up a bit.


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## gibor365 (Apr 1, 2011)

> XSH has a yield to maturity now of 2.25%, less 0.13% MER = 2.12% yield for short term corp bonds.
> 
> XSH is more liquid than GICs, but less safe.


What is "maple" means in XSH? I srated to compare XSH vs VSC - similar structure, duration and credit rating .. Why XSH gives much higher YTM?


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## rl1983 (Jun 17, 2015)

tygrus said:


> I just saw that RBC is offering 2% in HISA. So things must be coming up a bit.


That's only if you move money from another financial institution into RBC. They will not honor that rate in any way shape or form otherwise.

I would expect mortgages to rise first ( seems like they already have ) and products that can actually put money back into your pocket to rise last.


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## gibor365 (Apr 1, 2011)

Also watching Nuveen CEF JMM, yield close to 6%, 1/3 of fund US Treasury, 1/3 credit rating BBB and higher, 1/3 junk bonds (BB and lower)


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## james4beach (Nov 15, 2012)

gibor365 said:


> What is "maple" means in XSH? I srated to compare XSH vs VSC - similar structure, duration and credit rating .. Why XSH gives much higher YTM?


XSH and VSC are almost the same thing. The yield quote on the Vanguard page says "As of close 30 May" whereas the XSH yield quote is from yesterday, so they are giving yields from different points in time. If you compared them on the same day, I think they have almost identical yields.

But over time, XSH has outperformed slightly, probably because it holds slightly lower quality debt.

I'm still not sure that XSH/VSC is any better than holding a 5 year GIC ladder, but it has better liquidity. I'm considering it for my TFSA.


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## tygrus (Mar 13, 2012)

The only way to get yield is to create it yourself in a business. All these other passive stocks and bond ideas and funds arent paying sh*t and are a waste of time and not worth the risk.


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## gibor365 (Apr 1, 2011)

> I'm still not sure that XSH/VSC is any better than holding a 5 year GIC ladder, but it has better liquidity. I'm considering it for my TFSA.


 I'm also considering to add some FI ETF to my wife TFSA.... it's pretty inconvenient to create 5 y GIC ladder withing TFSA considering current annual limits. In non-reg, I'm getting much higher interest with plaing with online banks and tangerine HISAs/GICs promos


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## fatcat (Nov 11, 2009)

tygrus said:


> I just saw that RBC is offering 2% in HISA. So things must be coming up a bit.


a teaser rate expires, a few months


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## james4beach (Nov 15, 2012)

gibor365 said:


> I'm also considering to add some FI ETF to my wife TFSA.... it's pretty inconvenient to create 5 y GIC ladder withing TFSA


Did you mean fixed income ETF? Yeah, TFSA is a good place for bond ETFs.

*VSB* is the safest, short term bonds. You won't find the up-to-date yield on the Vanguard site but it's going to effectively be the same yield as XSB, 1.6%

*VSC or XSH* is slightly more risky due to high corporate exposure, and offers more yield, 2.1%

Those yields are the best estimates for the total return you'll get over about 2 or 3 years from now.


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## gibor365 (Apr 1, 2011)

> VSC or XSH is slightly more risky due to high corporate exposure, and offers more yield, 2.1%


 imho, if it's investment grade bonds, the risk is not big.

I'm wondering if in Canada exist ETF - some analog of JMM, for example, 1/3 Treasury/Government bonds, 1/3 coraporate investment grade and 1/3 junk?


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## james4beach (Nov 15, 2012)

I agree that VSC or XSH is not very risky. However if there is a market meltdown or credit crisis, you will likely see their prices (temporarily) decline sharply, whereas this will not happen with VSB.


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## gibor365 (Apr 1, 2011)

james4beach said:


> I agree that VSC or XSH is not very risky. However if there is a market meltdown or credit crisis, you will likely see their prices (temporarily) decline sharply, whereas this will not happen with VSB.


Not sure about VSB.... if Canada credit rating will drop couple of notches or if QC will setup new separation referendum, imho, VSB can decline sharply


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## james4beach (Nov 15, 2012)

You might be right. I shouldn't get overconfident about the safety of VSB.


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## gibor365 (Apr 1, 2011)

james4beach said:


> You might be right. I shouldn't get overconfident about the safety of VSB.


just a note...in US several corporation has better credit rating than USA itself


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## james4beach (Nov 15, 2012)

gibor365 said:


> just a note...in US several corporation has better credit rating than USA itself


Maybe, but US govt paper acted much better than corporate paper overall in 2008.

Here was BSV, an American short term bond fund that is very similar to our VSB and XSB. Its price briefly crashed, with *-6.7% drawdown* - really bad
http://stockcharts.com/h-sc/ui?s=BSV&p=D&st=2008-07-01&en=2009-01-01&id=p94756921319

Here was SHY, purely government debt. Its price did not crash at all. It had only -0.8% drawdown during the volatility.
http://stockcharts.com/h-sc/ui?s=SHY&p=D&st=2008-07-01&en=2009-01-01&id=p79491985888

So if there's a Canadian credit or banking crisis, I would expect VSB and XSB (as good as they are) could crash briefly. Unfortunately, there is no major, well established Canadian ETF that is fully concentrated in government bonds and t-bills like the American SHY and SHV. BMO has one but it's very small, with poor liquidity.


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## gibor365 (Apr 1, 2011)

In a big financial crisis, 5 y GIC will be even worse... as if we have hyperinflation ,even 10%, and you have GIC locked for 2.5%,you gonna loose a lot of money....


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## gibor365 (Apr 1, 2011)

> Maybe, but US govt paper acted much better than corporate paper overall in 2008.


 you are comparing ETFs with many holdings.... for example JNJ or Microsoft has AAA rating and US doesn't


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## JackJac (Mar 13, 2017)

tygrus said:


> The only way to get yield is to create it yourself in a business. All these other passive stocks and bond ideas and funds arent paying sh*t and are a waste of time and not worth the risk.


Amen.


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## GreatLaker (Mar 23, 2014)

gibor365 said:


> What is "maple" means in XSH? I srated to compare XSH vs VSC - similar structure, duration and credit rating .. Why XSH gives much higher YTM?


Maple bonds are foreign bonds issued in the Canadian market in Canadian dollars. They give foreign issuers access to Canadian investors'money. They let XSH have some foreign bond holdings without being exposed to currency fluctuations or currency hedging.

I looked at the holdings a few years ago when I was considering holding XSH and it did not seem like it held many maple bonds. Most of the holdings look like Canadian issuers. Google "Maple Bonds".


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