Dale Jackson

Personal Finance Columnist, Payback Time

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Scotiabank is the latest borrower trolling for cheap cash from yield-hungry savers. It’s offering a new high interest savings account with a 1.6 per cent yield.

Most of us think of the big banks as lenders but a lot their profits come from borrowing at low rates, lending at high rates, and feasting on the spoils of the spread.

Here’s the catch: to get that juicy 1.6 per cent, Scotiabank keeps your money for a year. As BNN’s Ian Vandaelle points out, it’s essentially a guaranteed investment certificate. It’s not even a good GIC considering some currently pay out more than two per cent.  

Scotiabank’s tempting offer comes a week after the Canadian government floated the idea for an ultra-long bond that would pay out 2.75 per cent provided the lender is locked in until 2064.

Interest rates are already on the rise and central banks in Canada and the U.S. are expected to keep hiking them as the economy grows. Get ready to see more institutional borrowers looking for cheap money for long periods of time so they can widen that spread.

Retail investors should keep in mind the primary objective of fixed income in a portfolio is to act as a hedge against risk in the equity portion of the portfolio. You should discuss the specific fixed-income products with an advisor, but most fixed-income experts recommend a laddering strategy where maturities are staggered over several time periods to ensure plenty of opportunities to get the best going rates as they rise.

At some point, borrowers will start offering better yields at the long end – and that’s when you can lock in.