Help investors move away from Canada Savings Bonds

“Canada Savings Bonds, or CSBs, had a place and a time, and they’ve outlived that time,” says Walter Posiewko, a senior portfolio manager at RBC Global Asset Management.

Posiewko, who once worked at the Bank of Canada as a capital market analyst and senior bond trader, adds, “CSBs have been bumped aside by newer products, such as ETFs, mutual funds and deposit notes, that were not around when CSBs were launched in 1946.”

The bonds were designed to fund WWI and WWII, he explains. So, even though CSBs have evolved over the last 70 years, “in this environment of extremely low yields, CSBs have just lost their edge.”

This reality hasn’t been lost on the federal government, according to a recent CBC report, which suggests the Liberals may end the CSB program in the next federal budget. Government sources told Radio-Canada this could be the last year for the bonds.

One reason to end the program, says Posiewko, is “the cost of administering [it] is nearly $60 million,” according to a 2015 government-commissioned review of the program, which was prepared by KPMG for the Department of Finance.

The KPMG report concluded the program is “no longer a net source of funds for the government, since it has been necessary since 1987 to borrow on the wholesale market to fund the net yearly redemptions. In addition, from the perspective of the Canadian public, there is currently only a very limited need for the Retail Debt Program.”

KPMG calls for end to CSB program

KPMG recommended the CSB program be wound or pared down in a 2015 government-commissioned report. Currently, the CSB program, or the Retail Debt Program, offers Canada Savings Bonds and Canada Premium Bonds through either payroll deductions or cash payments.

The report found the operating costs of the program were $58 million as of 2015, which was “equivalent to the yearly interest costs (approx. $58 million) on the outstanding stock of retail debt.”

Also, while people are still buying bonds through banks and investment dealers, KPMG says the “sales [of CSBs and CPBs] have gradually shifted predominantly to the payroll sales channel. Ten years ago, sales through the payroll sales channel amounted to $1.3 billion and represented 49% of total sales. They now represent 88% of total sales at $1.5 billion,” with people mostly valuing the bonds because they help them save automatically.

“An end to the program wouldn’t make or break the economy, [but] it would be a significant move for the government from an optical perspective,” says Posiewko. Plus, international bond markets have developed and there are more options for governments to obtain funding, he adds.

So far, Finance Minister Bill Morneau hasn’t confirmed CBC’s report. Following a cabinet meeting in late September, Morneau told reporters, “I know there are Canadians who make use of [CSBs]. I also know that my ongoing responsibility is to make sure that the programs that we have in place function as we expect them to.” He added the government hasn’t decided whether to end the CSB program, but that he’s hoping to get feedback on its value in pre-budget consultations.

What should investors do?

Andrew Johns, lead financial advisor in the Cash Management Group at Raymond James in Vancouver, says people buying the bonds today would be motivated to invest in something else if the CSB program were axed, and that’s why he welcomes such a move.

He explains, “Every year, in June and October, we get CSB pamphlets mailed to our office and the materials get put into the recycling bin. […] The size of the Canada Savings Bonds program has diminished and one of the reasons is they don’t pay anything; they’re sometimes referred to as ‘Canada Sucker Bonds.’”

He adds, “The current series that’s being offered only pays about 0.5% per year, while the Canada Premium Bond is paying 0.8% in the first year, 0.9% in the second year and 1% in the third year. Plus, CSBs only go for three years now, whereas they used to go for five-year and even 20-year terms.” He says high-interest savings accounts can pay more than 0.5%.

Some alternatives are GICs and provincial bonds, says Posiewko. “CSBs offer one of the lowest yields in the market because of the safety that comes with them. If you work out of the risk-return spectrum, you find that at the bottom left is CSBs, and that’s always been the case,” whereas GICs and provincial bonds—along with mutual funds, ETFs and deposit notes—offer more yield (and more risk).

But the fate of provincial savings bonds may also hang in the balance, he adds. “They may not be a sufficient form of funding either, and they’re not necessarily an attractive product for the average retail investor. People understand the low yields [of] government paper. We have a more sophisticated retail environment now.”

Government of Canada Treasury Bills are a better option than CSBs, and those are available via auction, says Johns. Or, “if you’re talking about someone with less than $100,000, then she can go put her money in any chartered bank and that gets you CDIC insurance.”