The “Big Five” Canadian banks include Royal Bank of Canada, Toronto Dominion Bank (TD Canada Trust), Bank of Nova Scotia, Bank of Montreal and Canadian Imperial Bank of Commerce (CIBC). Are there other viable options?
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For a long time, inflation-linked bonds like TIPs (Treasury Inflation-Protected Securities) in the U.S. or Government of Canada Real Return Bonds (RRBs) seemed like valid alternatives to nominal bonds for inflationary environments. If inflation ticks above certain levels, such bonds—or exchange-traded funds (ETFs) that hold them—tack on extra interest payments twice yearly, commensurate with the rise in the official inflation rate.
Matthew Ardrey, a wealth advisor with Toronto-based TriDelta Financial, says that while inflation’s average 2% annual rate over the last 20 years has been considered “benign,” it’s still 40 basis points higher than the average Bank of Canada overnight rate during that period. “It has been eroding risk-free returns for a long time.”
Prevailing interest rates have been less responsive to inflation dynamics in that time frame, Ardrey adds. “Central banks have communicated a tolerance for higher inflation rates in order to foster growth.”
Duration risk and inflation-linked bonds
TIPS were designed for the U…
