The best GIC rates in Canada have jumped since early August. The top five-year rate is 4.45 per cent, up from 4.10 per cent on Aug. 5, and the best three-year rate has risen 45 basis points to 4.35 per cent.
Issuers were following the bond market. Over the same stretch, the two-year Government of Canada yield climbed 43 basis points to 3.25 per cent and the five-year 37 points to 3.54 per cent.
Shorter terms have risen the most. The 10-year yield gained 28 basis points and the long bond only 18. That is a market bracing for rate hikes, and the war with Iran gives it reason.
Canadian inflation was 3 per cent in August, with gasoline up 22.8 per cent, though core measures stayed near 2 per cent. The Bank of Canada held its rate at 2.25 per cent on Sept. 2 but warned that high oil prices could spill into other prices. The U.S. Federal Reserve raised its rate on Sept. 16.
Why higher rates may last
If oil were the whole story, markets would expect the Bank of Canada to hike now and cut once the shock passes. They don’t. Swap markets imply the overnight rate climbing to about 3.5 per cent by 2028 and remaining near that level through 2031. That suggests markets see more than a brief oil shock.
Separately, Bank of Canada research finds that the premium investors demand to hold long-term Canadian bonds has risen, partly because of concerns about the supply of government debt.
Artificial intelligence isn’t the main reason either. When AI leaders called for slower development, U.S. yields didn’t fall. PIMCO counts AI-related bond issuance as a factor but sees government deficits as the central one.
The IMF puts U.S. government debt at about 126 per cent of GDP and Japan’s at about 204 per cent. Japan’s 30-year yield is near its highest since the bond’s 1999 debut as the government weighs record spending requests.
That gives Japanese insurers and pension funds, long big buyers of foreign bonds, less reason to invest abroad. In France, with debt near 118 per cent of GDP and large deficits, the 10-year yield topped 4.2 per cent on Sept. 1, the highest since 2008.
Central banks that once bought bonds with little regard for price have stepped back, and private buyers want to be paid for the risk. TD Economics points to heavy government and corporate borrowing and weaker demand from traditional bond buyers as forces keeping U.S. and global yields elevated. Canada borrows less and its yields have risen less, but long-term rates are set globally.
What it means for savers
The war-driven part of today’s rates sits mostly in one- to three-year terms. If prospects for peace improve, one to three-year GIC rates could fall quickly. Five-year rates rest on more lasting forces. Two- and three-year GICs deserve a look now, since one diplomatic announcement could significantly reduce their war premium.
Keep money you may need soon in a savings account. The top standard savings rate is 0.8 percentage points below the best one-year GIC rate, though the savings rate can change. For money you can lock away, compare two-, three- and five-year GICs.
The war explains why GIC rates jumped. Government debt explains why they may not fall back soon.
Interest rates are provided by WOWA.ca, which gathers, aggregates and freely disseminates data on mortgage rates, savings accounts, and GIC rates from 50+ Canadian financial institutions.
Ali Nassimi is a financial writer and analyst at WOWA.ca, a Canadian personal-finance platform.
