WEALTH Matters — FALL 2011

INTEREST RATE TRENDS

The third quarter of 2011 saw a continuation of the decline in GIC and bond interest rates that began in the spring. The graph compares rates across 1- to 5-year terms over the past 3 years. The shortest term rate actually rose marginally in the past quarter, but remained at its average of the past two years—it had been lower for much of 2009. Meanwhile all terms longer one year saw reduced rates, which have touched new lows. The best 5-year GIC rate covered by Canada Deposit Insurance Corp. is now hovering around 2.6%.

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We had already seen some rate reductions by the end of the second quarter, as expectations for economic growth were reduced, along with the threat of inflation. Weak third-quarter global stock markets and a possible Greek government debt default have caused  fearful investors to seek the safety of bonds, pushing bond prices up and effective interest rates lower. Since inflation is expected to remain within the central bank’s target range, bond investors are not demanding large premiums for holding longer term maturities.

YEAR END TAX PLANNING

Case Study—LIFE INSURANCE NEEDS

Interest Rate Trends

Investment Market Commentary

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Despite the yield curve becoming flatter, it’s notable that 5-year terms still pay almost 1% more than 1-year terms—about the same spread that existed in 2008 before the subprime debt crisis pushed rates sharply lower. Our clients who maintain a ‘ladder’ of longer-term GICs with staggered maturity dates continue to earn much higher average yields than those sticking to short terms hoping for rates to rise. Low interest rate conditions help soften the blow of reduced government spending which is surely in the cards for the US and much of Europe, and will reduce inflation pressures.

These latest rate declines are making it harder than ever for retirees to meet their income goals without encroaching on their capital. There are many ways to produce more income in this environment, for example, using a Global Bond Fund that provides us the higher yields available outside North America (ie Australia, Turkey, Brazil), or converting interest income to capital gains to save half the tax, or seeking dividend income through a portfolio of dividend-paying stocks and getting the dividend tax credit.

One of the easiest ways we have found to help compensate for the low rates is by offering high interest savings accounts that pay many times what the major banks do. Right now, you can earn 1.75% daily interest on your savings!

A Manulife Advantage Account is a virtual bank account that is linked to your regular chequing account. You can transfer your excess cash balances to your Advantage Account, earn 1.75% daily interest, and then transfer whatever you need back to your chequing account whenever you need it, with no service charge.

Manulife Advantage Account

1.75% Daily Interest

 

Bank Savings Account

Average 0.25% Interest

Transfer Instructions by Phone or Internet

For many years we had been using ING Investment Savings Accounts for this purpose, but we have found that Manulife consistently pays higher interest rates, and offers additional benefits. We can set up an account for you in a matter of minutes with a simple application form. Please call us if you would like to find out more.

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