CSBs – a Machiavellian plot?
Surprise! This year’s first CSB issue looks like it will fall flat on its face!
Earlier this month the Department of Finance announced the interest rates for the November series of Canada Savings Bonds (CSBs) and Canada Premium Bonds (CPBs) and I almost thought it was a joke when I saw them. Then I realized that maybe, just maybe, the federal government really wants Canadians to put their money somewhere else so Ottawa won’t have to do this any more. Could they really be that Machiavellian? Of course they could!
First let’s look at the rates. For the basic CSBs, the government is prepared to pay you the handsome sum of 1.35 per cent for a year, with no guarantees for the future.
For the CPBs, which are not as liquid and are intended for registered plans, you’ll get 1.7 per cent in year one, 2.2 per cent in year two, and 3.2 per cent in year three. The average annual compound rate of return over three years would be 2.36 per cent.
Would you buy a used car from these folks? I thought not.
Where else could you put your money? For starters, if you want maximum liquidity anCDIC insurance coverage, consider the ING Direct Investment Savings Account, which currently pays 2.25 per cent. Granted, that is not guaranteed but the chances of the rate falling to 1.35 per cent, or anything like it, in the next 12 months are slim to none.
Or you could consider a no-load money market fund. Altamira T-Bill is one that I like. It returned 2.17 per cent over the 12 months to Aug. 31 and because short-term rates are rising I expect it will gain between 2.25 per cent and 2.5 per cent in the next year. If you don’t want to pay Altamira’s $40 set-up fee, you could look at one of the bank money market funds although they haven’t performed up to the same standard.
For three-year money, even the big banks will do better than the CPBs. Royal Bank is currently offering 2.55 per cent on a three-year GIC, and it has deposit insurance coverage up to $60,000. You’ll do even better at the smaller banks; credit unions, and trust companies; ING Direct is paying 3.65 per cent on three-year money right now.
Yes, if you go with a GIC your cash is locked up while you can get it out of a CPB once a year if the money is needed. But when you look at the difference in return, that limited liquidity isn’t worth the cost.
Next page: Why you should check your older bonds
Several weeks ago, the Finance Department released an independent report which concluded that the whole CSB program has become too expensive and irrelevant to the investment needs of Canadians. It recommended that it be scrapped.
The response of Finance Minister Ralph Goodale was to say that CSBs remain an important part of his department’s policy. The fall campaign would proceed as planned and in the meantime the government would look at ways to overhaul the program.
Now that we’ve seen the rates on the new series, which is dated Nov. 1, I have to wonder if in fact the Finance Department is really setting the stage for killing off CSBs by virtually guaranteeing failure. It would make it a lot easier to go before Parliament and announce the demise of the program if Mr. Goodale could produce numbers showing that nobody, but nobody, is buying them any more. We’ll see how this all plays out.
Take care with older bond issues
One final comment before I leave this topic for now. If you have some old CSBs stashed away, don’t be too quick to cash them in. Take a close look at them first.
That’s because until quite recently some issues of CSBs included guarantees of future interest rate increases. Some of these issues have a guaranteed return of 4 per cent for the current year. The series to look for are S58, S59, S64, S65, S70, S71, S76, and S77. If your bonds are from any of those issues, hold on to them for now.
If you have any bonds from series S51, put them into a vault. They were issued in 1996 and, believe it or not, offered escalating interest rates for 10 years. For the 12 months starting Nov. 1, they will pay an amazing 8 per cent! But it gets even better. In the following year, beginning Nov. 1, 2005, the promised rate is 8.75 per cent! Talk about a bonanza! And all of it guaranteed by the Government of Canada.
Some of the older issues of Canada Premium Bonds are also worth holding on to. The first series (P1), issued in 1997, is especially lucrative. It pays 7 per cent until March 1 or April 1, 2005 (depending on when you bought them). In the next year, the rate moves up to 7.5 per cent, and then escalates to 8.5 per cent for the 12 months to March 1 or April 1, 2007. That will add some juice to an RRSP!
You can check out the rates for any active series of CSBs or CPBs by going to http://www.cis-pec.gc.ca/eng/bonds_rates.asp
Remember that if you decide to cash in any CSBs, wait until the first of next month. If you cash in mid-way through a month, you’ll lose all the interest for that month.