Dale Jackson

Personal Finance Columnist, Payback Time

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Investors who think their fixed income holdings are the safe part of their portfolios might want to think again. The Bank of Canada is warning that some corporate debt is vulnerable due to companies borrowing “well above” historic levels. The central bank singles out firms in the commodities sector, which are carrying higher debt loads due to low resource prices.

It’s a real kick in the teeth for savers faced with the sad choice between rock-bottom government bond yields and slightly higher than rock-bottom yields from corporate bonds. If you read between the lines, Bank of Canada Governor Stephen Poloz is saying that little extra juice has become riskier. That runs counter to the objective of fixed income in an investment portfolio: to cushion risk from the equity markets. Investors struggling to meet return goals have already had to push into riskier fixed-income territory through dividend stocks.

To illustrate just how bad things are for savers, the yields on five-year bonds that are considered investment grade don’t exceed three per cent. Only non-investment grade bonds, often referred to as “junk,” generate higher yields but carry a greater risk of default.

In comparison, a one-year guaranteed investment certificate (GIC) yields about 2.5 per cent.

Most bond experts say the only thing savers can do is stay in short-term debt with maturities laddered over time to allow more opportunities to take advantage of higher rates when – or if – they ever come.