Stay alert if you’re an investor who favours the safety of GICs.

Financial markets are revising the outlook for inflation, and in turn, interest rates. Keep your eye on Government of Canada bond yields to follow the action for rates on guaranteed investment certificates.

The yield on the five-year Canada bond, an influence on five-year GICs, jumped this week to 3.4 per cent early Friday from 3 per cent a week earlier. This sizable move by bond market standards was brought to you by the April inflation report from Statistics Canada. It showed that the year-over-year inflation rate last month edged up to 4.4 per cent from 4.3 per cent in March.

Discouraging is the word to describe this change, given that inflation has been falling hard since reaching 8.1 per cent in June 2022. Financial markets had expected inflation to be around 3 per cent late this year and rate cuts to start happening around that time or in early 2024. Now, bets for a rate increase this summer are piling up.

Bonds have fallen in price in reaction to this changed outlook, which is why yields are up for government and corporate bonds. Expect GICs to follow if bond yields hold at recent levels.

The highest GIC rates currently are for one-year terms – expect 4.75 per cent to 5 per cent from alternative banks and trust companies and 5 per cent or slightly more from deposit brokers.

Five-year GIC rates are generally in the 4.4 to 4.75 per cent range. We could see these rates move higher if five-year bond yields hold and the spring housing market stays hot. GIC issuers sometimes juice their rates a bit to attract money for mortgage lending.

Short-term GIC rates are usually significantly lower than long-term rates. We’re seeing the opposite now because markets see potential for interest rates to rise in the near term and then fall back in the medium term as the economy slows and possibly lapses into recession.

Inflation will eventually fall to the preferred range around 2 to 3 per cent. When it does, GICs that lock in rates in the 4 per cent range and higher will look darn fine in your portfolio.

— Rob Carrick, personal finance columnist

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Stocks to ponder

Brookfield Property Partners (BPYP-PR-A-T) Real estate companies with exposure to office buildings are struggling amid high vacancy rates and an uncertain future as many people continue to work from home. If buying the beaten-up units of real estate investment trusts at the depths of despair sounds too risky, here’s another approach: Take a look at the preferred shares of Brookfield Property Partners, which can yield more than 10 per cent right now. There’s certainly risk here, but a compelling opportunity too, says David Berman.

The Rundown

Don’t be fooled by gold’s glitter

Time to buy gold? As the legendary metal nears all-time highs – and headlines project more of the same ahead – it may seem intriguing. But beware: Gold is more volatile than stocks, with lower long-term returns than bonds. It requires impeccable market timing – otherwise, it is a drag. If you can’t time stocks, which rise far more often than fall, don’t try gold, argues billionaire investor Ken Fisher.

U.S. debt ceiling deal could stall safety flight fueling megacap rally

A potential deal to lift the U.S. debt ceiling could spur money managers to pare holdings in the massive technology and growth stocks that have been havens this year and shift into the rest of the market, reports Reuters’ David Randall.

How to beat the pros, Part 5: Two stocks you never heard of that fit our investing strategy

Portfolio managers Jason Del Vicario and Steven Chen are back with the next instalment of their beat the pros series. This time, they look at two little-known stocks that they think are going to do very well in the years ahead.

Why is the U.S. dollar so strong again?

If investors agree on one thing this year, it’s that the dollar is going to fall. That’s made the greenback’s 2% bounce over the last month particularly confusing. Harry Robertson of Reuters explains what’s behind the dollar’s recent rally.

Investors favour Japan’s rising sun over China’s fading star

Long Japan, short China. If there is a general macro, relative value trade playing out right now, it might be that as the contrasting fortunes of Asia’s economic and financial behemoths become starker by the day, as Reuters’ Jamie McGeever reports.

Others (for subscribers)

Number Cruncher: 10 U.S. stocks with attractive fundamentals in hot sectors

Number Cruncher: 10 mining stocks facing climate-change risk

Number Cruncher: 20 undervalued large cap stocks on the TSX

Friday’s analyst upgrades and downgrades

Thursday’s analyst upgrades and downgrades

Thursday’s Insider Report: Million-dollar purchases in these two dividend stocks

Globe Advisor

Why this $1.75-billion money manager has more than half of his portfolio in cash

Why early RRIF withdrawals don’t work for most retirees

Record buyback spree attracts shareholder complaints

Are you a financial advisor? Register for Globe Advisor (www.globeadvisor.com) for free daily and weekly newsletters, in-depth industry coverage and analysis.

Ask Globe Investor

Question: What is the best way to reinvest dividends?

Answer: Reinvesting dividends is one of the most effective ways to build wealth over the long run. That’s because it harnesses the power of compound growth, which is an investor’s greatest ally.

In the old days, reinvesting dividends was a cumbersome process. You had to enroll your shares in the company’s dividend reinvestment plan (DRIP), which required obtaining the shares certificates from your broker – for which there was a fee – and registering them in your name with the company’s transfer agent. When it came time to sell, you had to deliver your shares to a broker to carry out the transaction.

It was a pain in the behind, but the benefit of these traditional company-operated DRIPs was – and still is – that they support fractional share purchases. That means every penny of your dividend gets reinvested. Even as electronic record-keeping has replaced paper share certificates at many companies, these DRIPs still operate in much the same way.

Nowadays, investors have many more options for reinvesting dividends.

Most discount brokers now offer their own in-house DRIPs. The advantage of these plans is that you don’t have to register the shares in your own name – they stay with the broker – and you have more control over the timing and price when you sell. The downside is that most broker-operated plans only allow you to purchase whole shares. So, for example, if you receive $50 worth of dividends and the shares you’re reinvesting in trade at $40, you’ll acquire one additional share and the remaining $10 will sit in cash. That means you won’t get the full benefit of compounding.

The good news is that there are some easy workarounds.

One solution is to sweep the residual cash into a low-cost index mutual fund periodically. Mutual funds don’t charge commissions on purchases, so it’s a cost-effective method. What’s more, mutual funds allow partial unit purchases and reinvest their dividends by default, so they make the most of compounding. The disadvantage of this method is that mutual funds typically charge relatively high management expense ratios (MERs).

But there’s a way around that, too. A few years ago, with the arrival of commission-free exchange-traded funds at many brokers, I stopped using mutual funds to soak up cash and turned to ultra low-cost ETFs instead. For example, one of the ETFs I use is the BMO S&P/TSX Capped Composite Index ETF (ZCN), which has an MER of just 0.06 per cent. There are many other low-cost ETFs out there; I suggest you check to see if your broker supports commission-free ETF trades and, if so, which ones qualify.

I still occasionally buy shares of individual companies – and pay a commission – if I have a chunk of cash sitting around and a stock looks especially attractive. But the simplicity and cost-effectiveness of sweeping cash into a low-cost ETF is appealing. It makes the most of compounding, with the added benefit of diversification.

–John Heinzl (E-mail your questions to jheinzl@globeandmail.com)

What’s up in the days ahead

Take a bow readers – so far, you’re faring much better than us Globe staff in our recently launched investing club. Ian McGugan will provide an update.

More drama on the horizon: World market themes for the week ahead

Click here to see the Globe Investor earnings and economic news calendar.

More Globe Investor coverage

For more Globe Investor stories, follow us on Twitter @globeinvestor

Compiled by Globe Investor Staff

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