How to yield 8% or more as your fixed income yields decline
In the past 18 months, there has been a big migration of investment dollars to money markets, guaranteed investment certificates and short-term bonds — five per cent yields will do that.
The problem is that they are now heading in the other direction. I expect Canadian money market rates to be paying well under four per cent by year-end and could be less than three per cent a year from now.
As we shift from an investment environment of rising rates to one of declining rates, how do you keep investment yields high without taking on too much risk?
An interesting investment option can be found today that is paying yields in the eight per cent to nine per cent range on investments we believe are only slightly higher risk than GICs and money market funds. These are investments that are offered by most of the big banks in Canada, but also available through some advisers. They are not marketed aggressively, but hold great appeal for many of our clients.
A current example is as follows: it’s offered by a Big 5 bank (but available more broadly); pays 8.64 per cent per annum, with interest paid monthly; can be called at par (the price you paid) at any point from two years to seven years, but you keep all interest; can be called after two years if the index (in this case, Canadian pipelines) is up more than five per cent from the purchase date; can be invested in any type of investment account: registered, non-registered, corporate, etc.; priced daily and can be sold at any time — it is not locked in — but there isn’t a secondary market, so you can’t buy the note after it closes; and this specific note is available until Sept. 11.
Like all investments, there is a connection between risk and reward, although we believe the reward
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