Bonds or GICs

You know, I think the GICs have been, you know, for investors and advisors that have used GICs for the last couple of years. You know. It's been a great decision because bond markets have been down and you've had a degree of stability, but when you're going into a GIC there’s two things that you're doing, Number one, you're giving up a degree of liquidity in return, for more guaranteed rates. But when you're going into a market, as we are now, where growth is starting to slow, and recession probabilities are starting to increase, liquidity is something that's much more valuable than it has been, because advisers don't know how much in clients’ costs are going to go up, how much school fees are going to go up, how much car insurance is going to go up, how much health insurance is going to go up and so ultimately, they need to have a degree of liquidity. And GICs today, that GIC that was invested in say, two years ago, or a year ago, and now you're getting four to five percent, investment grade corporates or credit is now giving you close to six and a half to seven percent. One is liquid and one is not.

The other thing with GICs is that GICs are guaranteed but only up until a hundred thousand Canadian dollars. Anything after that you are taking the credit risk of the bank. And so if the bank goes under the ultimately, anything above 100,000, you can be liable to lose. No. Yes. Canadian banks are very strong, but we've been in a banking crisis, we know that even the strongest banks can be impacted. And so, in a bond fund you can have the equivalent of a GIC after 100,000 guarantee is ultimately the very similar risk to a financial bond from say HSBC or Goldman Sachs, again very strong bonds, and if the senior bonds default, it's very likely that that the GIC is not going to deliver. And remember that GIC is not ringfenced, it's tied to the bank, it's tied to deposits. Whereas in a bond fund, when you buy bonds and you're buying senior bonds, one you have access to many different issuers, many different banks, many different companies, and you also have access to, and the fact that it’s a bond fund so your assets are ringfenced. They’re ringfenced and they are held at the custodian. So even if something happened to Vanguard, your assets are completely ring-faced. And so, it's when you get that degree of protection. So today I would say, you know, to investors is the GICs liquidity is at a premium not getting paid as much as you were and be very mindful of credit risk.