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GIC Rates Increase
October 23, 2022
4:43 pm
dickyran333
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About a month ago I asked a credit manager at a bank why the banks are not increasing the GIC rates even though the BoC has been hiking the rate. He mentioned that it's because of the liquidity in Canadian (open) market. If the banks are able to borrow at 4.3% or 4.4% from other banks, even for a longer term, then why would they offer 4.8% or 5% on GICs, which involves dealing with retail investors and the overheads thereof. But he did mention that if the market liquidity dries up, the rates would go higher.

When we observe that the interest rates are not moving higher any more, we conclude that they are plateauing and will fall soon. However, I look at this as forming a resistance level for a stock. Just like when buyers eat up the liquidity, the stock breaks the resistance and fly much higher. The same behaviour could happen with interest rates.

October 23, 2022
4:51 pm
mordko
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If they take money at 5% then they need to lend money at a higher rate. 7% mortgages might have quite a bit of “resistance” unless either the house prices drop or salaries rise. By A LOT.

October 23, 2022
5:27 pm
dickyran333
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Yes, the housing prices have gone too far too fast and have to come down. The home buyers might have to pay higher mortgage rates but will be able to save due to lower home prices and sales and property taxes.

I heard that when we had similar inflation levels over 40 years ago, the 5-year fixed mortgage rates never fell below ten per cent for a full 18 years – from 1973 to 1991. The peak 5-year mortgage rate was 21% in 1981.

October 23, 2022
5:29 pm
savemoresaveoften
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agit said

so funny you sound like you just finished a meeting with Tiff Macklem.

Warren Buffett “A prediction about the direction of the stock market tells you nothing about where stocks are headed, but a whole lot about the person doing the predicting.”

“A prediction about the direction of the GIC tells you nothing about where GIC are headed, but a whole lot about the person doing the predicting.”  

A meeting with Tiff is not needed as he as zero power nor authority to set the GIC rate offer by any FIs. Thats not how FI works.....
I also shot down the idea of 1y GIC to reach 5% by August a few months ago after bank rose 100bps a clip. And yes it only got to 4.5%-4.6% in August. I am happy to see prove me wrong.

You can mark my words and I am happy for you to show me a 6% 5y GIC rate within the next 3 months.

October 24, 2022
4:10 am
savemoresaveoften
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agit said
Fact

- The markets are returning to the ‘old normal’ of higher bond yields link here

- BMO recently issued bonds are yielding over 6%. BMO just had an issue yielding 6.35% for 5 years. BMO wont be that if they thought rates will start to drop in a year.

Whether or not you like it those are the fact  

That is the wrong / misleading fact.

The BMO issue is a 10years bonds that pays 6.35% for year 1-5, then
Corra+spread year 6-10. It’s completely at BMO ‘ discretion to call it any time after year 5.
It is a floating rate bond from year 6-10 plus the investor sold a 5 year interest rate cap 5 year forward. The premium from this option is where the enhanced yield on the first 5 years is coming from.
So no they don’t cost them 6.35% for 5 years. And a retailer should not think of it as a 6.35% 5y bond either cuz it is not.

October 24, 2022
1:23 pm
Bobby J
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Norman1 said
Bank of Montreal announced it in their October 20 news release Bank of Montreal Announces Subordinated Note Issue.

Bank of Montreal needs to pay that rate on those notes because the investor doesn't know exactly when the funds will be returned. Could be as early as 5 years or late as 10 years, at Bank of Montreal's option.

What rate would you accept for a GIC that matures sometime between year 5 and year 10, at the option of the GIC issuer, on 10 days notice?

Bank of Montreal is not a hedge fund and knows that interest rates are not predictable. They will issue 5-year bonds at 7% if the bonds fund matching five-year commercial mortgages at 9%.

That will lock in a 2% spread and produce a 20% per annum return with 10:1 leverage on the required regulatory capital to back the mortgages. 20% return with no interest rate predictions required.  

"At any time on or after a Special Event Redemption Date prior to October 27, 2027, the Bank may, at its option, with the prior approval of the Superintendent, on giving not more than 60 nor less than 10 days' notice to the registered holders of the Notes, redeem all (but not less than all) of the Notes at a redemption price that is equal to the greater of the Canada Yield Price and par, together in either case with accrued and unpaid interest to, but excluding, the date fixed for redemption."

Does that mean that the bank has the option to redeem the notes prior to Oct 27, 2027?

October 24, 2022
2:22 pm
Norman1
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Yes, the bank will have the option to redeem the notes before October 27, 2027 should a "Special Event" occur.

According to the definition of “Special Event Redemption Date”, that would be

  1. a "Tax Event" that changes the tax treatment of the notes significantly or
  2. a Regulatory Event that disqualifies the notes from being Tier 2 Capital or Total Capital.
October 24, 2022
2:27 pm
Bobby J
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Norman1 said
Yes, the bank will have the option to redeem the notes before October 27, 2027 should a "Special Event" occur.

According to the definition of “Special Event Redemption Date”, that would be

  1. a "Tax Event" that changes the tax treatment of the notes significantly or
  2. a Regulatory Event that disqualifies the notes from being Tier 2 Capital or Total Capital.

  

Thank you. So pretty good odds this won't be redeemed prior to Oct 27, 2027. Looking for a fixed income investment that is 5+ years, and this seems fairly attractive, but want the return for at least 5 years, so this should work..

October 24, 2022
5:05 pm
savemoresaveoften
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Bobby J said

Thank you. So pretty good odds this won't be redeemed prior to Oct 27, 2027. Looking for a fixed income investment that is 5+ years, and this seems fairly attractive, but want the return for at least 5 years, so this should work..  

Bobby J said

Thank you. So pretty good odds this won't be redeemed prior to Oct 27, 2027. Looking for a fixed income investment that is 5+ years, and this seems fairly attractive, but want the return for at least 5 years, so this should work..  

Just keep in mind year 6 to 10 is a floating rate coupon. The downside is you receive a much lower coupon for the final 5 years of this 10y bonds.
The call feature in the first 5 years are typical of a NVCC bonds. NVCC were first issued in 2014, allows regulator to convert debt into common equity under distress situation to prop up the capital.
Because of this feature, they all offer a higher yield than a traditional bank debt issue.

October 24, 2022
5:55 pm
Bobby J
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savemoresaveoften said

Bobby J said

Thank you. So pretty good odds this won't be redeemed prior to Oct 27, 2027. Looking for a fixed income investment that is 5+ years, and this seems fairly attractive, but want the return for at least 5 years, so this should work..  

Just keep in mind year 6 to 10 is a floating rate coupon. The downside is you receive a much lower coupon for the final 5 years of this 10y bonds.
The call feature in the first 5 years are typical of a NVCC bonds. NVCC were first issued in 2014, allows regulator to convert debt into common equity under distress situation to prop up the capital.
Because of this feature, they all offer a higher yield than a traditional bank debt issue.  

For sure. Historically bank fixed floater bonds in Canada get called, and if not, I’m comfortable with Corra + 2.70%.

October 24, 2022
7:29 pm
mordko
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savemoresaveoften said

A meeting with Tiff is not needed as he as zero power nor authority to set the GIC rate offer by any FIs. Thats not how FI works.....

He can’t set the GIC rate but he can influence it indirectly. For example via QT and sucking up all the liquidity. We don’t actually know the future. Its a probability, not a certainty

October 25, 2022
4:51 am
savemoresaveoften
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mordko said

savemoresaveoften said

A meeting with Tiff is not needed as he as zero power nor authority to set the GIC rate offer by any FIs. Thats not how FI works.....

He can’t set the GIC rate but he can influence it indirectly. For example via QT and sucking up all the liquidity. We don’t actually know the future. Its a probability, not a certainty  

Of course no one knows the future, or at least those time travelers haven’t come out and admit it yet.

However when it comes to finance and investment, there is certainty in some cases. Just like the Nigeria prince asking for your help to transfer funds and you get a cut is a scam, it’s a certainty, not probability.

There is a fine difference between hope vs dream.

October 25, 2022
7:24 am
agit
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savemoresaveoften said

There is a fine difference between hope vs dream.  

There is a BIG BIG difference between Fact and Opinion. Your opinion are not supported by facts and principles, in which case it has not becomes an argument.

One of many i've learned in university. To 'argue' is to put forward an opinion through the process of reasoning, supported by evidence. An argument attempts to persuade through rational and critical judgement. Writing an argument is sometimes called a claim or a thesis statement, which is also supported with evidence.

opinion is not a fact, last post to you.

I will end with this

Dean said

Tip ➡ Ignore the Grumpy Ones sf-frown. Sadly, they can't help themselves.

    Dean
October 25, 2022
7:53 am
savemoresaveoften
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agit said
There is a BIG BIG difference between Fact and Opinion. Your opinion are not supported by facts and principles, in which case it has not becomes an argument.

  

My "opinion" remains 5y GIC rates wont reach 6% in the next month or 2 or 3. That is supported by facts that one just choose to ignore, cuz they "like" to see 6%....

You can choose to believe it will reach 7% and support it with all your facts and principles. Unfortunately that does not mean it will happen.

If this is a university exam, then yes you will get some part marks for justifying your "wrong" answer with assumptions, principles, etc. In investing, either you are right or wrong.

Every time someone says rates are not going much higher, you jump in quickly to counter why it should be higher. I will stop at that.

October 25, 2022
9:13 am
mordko
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A jump to 6% rate GICs in the next 3 months would be significant for a relatively short period of time. Unlikely but, of course, possible. The fact inflation is persisting at above 6% tends to suggest it might happen in the not too distant future, unless we hit a recession in the next few months.

October 30, 2022
3:56 am
Miked
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Well Tangerine still at top charts for most gic terms -well done!! They were proactive ahead of boc rate hike --Have some term ending in a couple months there & past coyple yrs had given up keeping a ladder there -- interesting to see if others (Oaken EQ ...) will match ... EQ did raise but still a little lower -- is this just another of Tan's lures or will they keep their rates high (next boc dec7 then jan25...). ?

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