November is a gloomy month: landscapes denuded of greenery; cold, gray, ever shorter days marking winter's imminent arrival; the terrible sacrifices of war recalled on Remembrance Day. For more than 65 years, the annual sales campaign for Canada Savings Bonds (CSBs) has injected some cheer into this dreary month with the opportunity to buy "a safe and secure savings product issued and fully guaranteed by the Government of Canada."
CSBs are safe, but that alone doesn't make them worthy of your investment dollars. You also need to consider: Do they provide a competitive yield? Are they easy to purchase and redeem? Do the terms and conditions include aggravating restrictions?
CSBs have traditionally been widely available for purchase and redemption wherever Canadians banked or invested, by payroll deduction at workplaces participating in the payroll savings program and directly from the government's CSB office. Low minimum purchases (currently $100) make them accessible to almost everyone. Also, since there are no age restrictions, CSBs are an easy way to teach children to save.
This year, the government made some significant changes to the CSB program that made them less accessible. Though both the regular Canada Savings Bond and the Canada Premium Bond (CPB) are still available, there are new restrictions on distribution channels.
As of Nov. 1, sales of the basic bond are now limited to the payroll savings program. This effectively puts the regular CSB beyond the reach of all but a relatively small group of working Canadians.
CPBs will continue to be available at retail branches of banks and other financial institutions, from investment dealers and directly from CSB customer-service staff.
Both types of bonds now have a term to maturity of three years, much shorter than the previous 10-year term. The Series S130 regular CSBs sold in October have an interest rate of 0.5%. Rates for future years will be set annually, based on market conditions.
High-interest savings accounts at institutions that are members of the Canada Deposit Insurance Corp. (CDIC) have a level of protection that is arguably similar to CSBs. The interest rate on the Series S130 bond compares unfavourably with these accounts.
For example, a search of the Savings & GIC Rate Tool on Morningstar.ca's Personal Finance page returned four deposit-takers that currently offer high-interest savings accounts yielding from 1.65% to 1.9%, more than triple the CSB rate. The four are Peoples Trust, Ally Financial, Canadian Tire Bank and Manulife Bank. Employees who have the option of buying regular CSBs by payroll deduction would be better off directing their money into one of these or other higher-yielding accounts.
The P80 Series of premium bonds sold during October and the P81Series, on sale throughout November, both pay interest of 1% in the first year, 1.2% in year two and 1.4% in the final year for an average annual compound rate of 1.19% if held to maturity.
Previously, CPB redemptions were limited to 30 days after each anniversary date of issue with all interest paid up to the redemption date. As of Aug. 1 of this year, CPBs became cashable at any time.
This increased flexibility comes at a stiff price. Investors who redeem CPBs prior to maturity receive only the interest paid up to the last annual anniversary date of issue. Existing CPB holders should note that this new rule applies to all previously sold and still outstanding CPBs.
Given the potential loss of several months' interest for redemption outside the anniversary date, investors drawn to this "cash at any time" feature are likely better off putting their funds in a high-interest savings account. Moreover, the cash will be immediately available. By contrast, depending on where a CPB is held, receipt of the principal and interest could be immediate or take up to two days after a redemption request.
Even if held to maturity, CPBs are not competitive. A search at Morningstar for a comparable investment, a three-year GIC with a minimum deposit of $100 or less, yielded one result: an Ally Financial daily compound GIC paying 2.15%. This return is significantly above the 1.19% CPB rate.
Assuming a minimum $1,000 purchase, a search of www.ratesupermarket.ca produced nine annual compound three-year GICs that beat the CPB interest rate. Two Manitoba credit unions, AcceleRate Financial and Outlook Financial, offered the best deal: 2.45%. The Deposit Guarantee Corp. of Manitoba insures these institutions, which may be a concern for some. Several CDIC-insured banks offer three-year GICs at better interest rates than a CPB. Of these, Dundee Bank of Canada had the best rate, 2.15%.
Clearly, investors can easily find other savings products that offer equivalent safety and flexibility with much higher rates of return than savings bonds. In their current form, CSBs and CPBs do not deserve a place in the portfolios of Canadians.