Have Canadian interest rates stabilized?

 

The rate increases may have concluded, or at least that's the prevailing sentiment. We've seen the overnight holding steady at 5.0% in Canada since the last raise on July 12, 2023[i]. That is more than six months and an eternity compared to the pace we witnessed while rates rose from March to July 2023[ii].

 

Knowing that the Canadian rates often reflect what happens south of the border, let's look at what the Federal Reserve has been doing. In the US, rate hikes were nearly identical to here, starting in March and ending in July 2023.

 

What does this mean to you, the investor, regarding your fixed income allocation?

 

At Allan Bush Investment Team, we know that the answer remains: "It depends." As the Core Inflation numbers (all inflation less several more volatile items like mortgage rates, food, and energy costs) fell back near the end of 2023, the upward pressure on rates has also lessened.[iii] We always find the Core Inflation number to be somewhat ironic given that where our families see inflation hit us the most is at the gas pump, the grocery store and what we pay on our mortgages. But that's a conversation for another day.

 

We saw a similar trend in the US and have read predictions of a further reduction out into 2025. The good news is that rates today are above where they have been on average for over a decade. The average rates for the past ten years have been 1.61% on the overnight, 1.51% for the Cdn 2-year bond, 1.61% for the Cdn 5-year bond and 1.88% on the Cdn 10-year bond.[iv]

 

If rates are higher now than they have been for over a decade, and sentiment tells us they may not be going higher from here, what should we do?

 

Again, we may expect to see some improvement in the positive cash flow from your portfolio's fixed income portion. Are we heading back toward 8% GICs? Not likely.

 

So, the suffering through less than robust fixed income returns is likely still ongoing. As a team, we have dedicated an enormous amount of time to searching for alternatives to fill the gap that this traditionally more stable asset class has left in your portfolio's income stream.

In our quest to find regular cash flow for your portfolios, we've examined a wide range of income-oriented options from High-Interest Savings Account (HISA) ETFs to alternative investments that are not correlated to the swings of the broader market.

 

At Allan Bush CIBC Wood Gundy Waterloo, we are happy to help you with a second opinion on your current investment plan. We have over xx families as treasured clients in Waterloo and surrounding areas and look forward to helping your family achieve financial success, too.

 

[i] Policy interest rate - Bank of Canada

[ii] Canadian Fixed-Income Forum - Bank of Canada

[iii] Canada Core Inflation Rate (tradingeconomics.com)

[iv] Canadian bond yields: 10-year lookup - Bank of Canada