By: Larry MacDonald

William MacKenzie of Weigh House Investor Services does not recommend GICs in his book The Unbiased Investor (2007). He says “experienced investors … know they can almost always get a higher return with no additional risk, and also have daily liquidity, by buying the corporate bonds issued by the same entity that is issuing the GIC.”

Intrigued, I did a quick comparison of yields on bank GICs and bonds (using bond yields quoted online by TD Waterhouse Fixed Income Centre). What I found is that bank bonds do beat their 2- to 5-year annually compounded GICs (even after the rather steep bond commissions changed to retail investors). Here are some examples:

For 5-year maturities, annual yield on Bank of Nova Scotia’s
GIC = 2.1% vs. Bond = 2.83%.

For 4-year maturities, annual yield on the Bank of Nova Scotia’s
GIC = 1.7% vs. Bond = 2.52%.

For 3-year maturities annual yield on Bank of Nova Scotia’s
GIC = 1.6% vs. Bond = 1.88%.

For 2-year maturities, annual yield on CIBC’s
GIC = 1.15% vs. Bond = 1.32%

For 1-year maturities, annual yield on Bank of Nova Scotia’s
GICs = 0.4% vs. Bond = 0.38%.

The differences are rather minimal, except perhaps at the long end. If interest rates ever do go back up, maybe the differences will become more substantial. If one considers the bonds of non-financial companies, the yields are higher: those rated A or better yield about 50 basis points more and those rated BBB or better, yield about 75 basis points more.

On the other hand, if one buys their GICs at the institution offering the best rate, they can do better than bank bonds (at this time). The best rates range from 1.6% on a 1-year GIC to 3.35% on a 5-year, according to Fiscal Agents. The average GIC rate goes from 0.85% for 1-year to 2.66% for a 5-year.