Rollback of Government Bonds

Just like Walmart there has been a Rollback in prices of Government bonds, but you will never hear anyone in the industry use the familiar term “Rollback”. The industry jargon is “Discounted Bonds”, but the end result is the same. Government of Canada bonds can now the bought at 10% or even 12% below the initial price. Everyone borrows money, individuals, corporations, and Governments and they pay the money back along with interest. Would you lend money to a Government if they paid you attractive interest? If the Government is unstable then you run the risk of not being repaid, however, I recently bought some Government of Canada and Government of Australia bonds for clients because we have comfort with these Governments paying their bills.

Benefits of Discounted(Rolled-Backed) Bonds as Alternative to GICs

In the realm of conservative investment options, Guaranteed Investment Certificates (GICs) have long been a favored choice for risk-averse investors seeking steady, predictable returns. However, with fluctuating interest rates and evolving market conditions, discounted government bonds have emerged as a compelling alternative. These bonds, purchased at a price below their face value, offer a unique set of advantages that can enhance an investor's portfolio. With a GIC you are lending the bank your money which can be used to fund mortgages. With Bonds you are lending the Government your money which is used to fund public spending.

Tax Advantages

Interest income from GICs is typically taxed at the investor’s marginal tax rate, which can significantly reduce net returns. In contrast, the income from government bonds is often treated more favorably for tax purposes. Recall how a rental property or stock is taxed capital gain when you bought the house at $900k and sold for $1million, or stock at $90 and sold at $100 then you only get taxed on initially 50% soon to be 67% of the capital gain. Likewise when a Government bond is purchased at $900 and matures at $1000 then its considered capital gain so only part of the $100 is taxed. On the other hand, when you earn $100 interest from a GIC, the entire $100 is taxed. This was the main reason my clients decided to opt for the bonds over GICs since they are still in a high tax bracket.

Liquidity & Flexibility

Government bonds generally offer greater liquidity than GICs. While GICs lock in the investor's funds for a specified term, often ranging from one to five years, its hard to break the GIC either with a penalty or you have to wait until it matures. Bonds can be sold in the secondary market before maturity if a family emergency arises and you need your capital. This liquidity provides investors with flexibility to respond to changing financial needs or to reinvest in other opportunities without incurring significant penalties.  

Safety & Security

Both GICs and government bonds are considered low-risk investments. However, government bonds issued by stable, creditworthy countries carry the additional assurance of being backed by the full faith and credit of the issuing government. This makes them one of the safest investments available, often referred to as low risk securities. After all, who normally bails out a Bank when it gets in trouble, the Government. Banks don’t bail out Governments, Government bail out banks. I would add that not all Governments are created equal so this is not a blanket statement that every Government in world has low risk bonds.

Conclusion

Discounted government bonds offer a robust alternative to GICs for conservative investors seeking enhanced returns, liquidity, tax advantages, and safety. While GICs provide predictable and guaranteed returns, the potential benefits of discounted government bonds, particularly in a low-interest-rate environment, make them an attractive option. Let’s connect by phone or virtually to discuss questions you may have about these options and other financial strategies.

Orlando Lopez,CFP,CIM,CIWM Book a Meeting Upcoming Webinars