With Canada’s big banks reducing some of their mortgage rates and the Bank of Canada worried about low inflation, it’s hard to get too concerned about the impact of rising interest rates.
Still, a new survey warns many Canadian investors aren’t prepared for the impact of rising interest rates that will inevitably come.
It says 58 per cent of Canadians with a retirement portfolio didn’t realize that rising interest rates could eat away at their investments, according to the poll from Leger commissioned by CIBC Asset Management.
Those most out of the loop were the Baby Boomers. The survey shows 65 per cent of people aged 55 to 64 didn’t understand the hit their retirement nest egg could take. That's even though Boomers closing in on retirement are expected to have more of their investments in fixed income assets, such as bonds.
“Rising rates can negatively impact investors who own bonds or fixed income securities because when interest rates rise, bond prices fall,” CIBC explains.
“An extended period of falling interest rates, and a flight to safety from equity market volatility has resulted in many Canadians investors loading up on bonds in recent years. But, most experts agree that this era of record-low interest rates has reached an end.”
The survey results also show that 54 per cent of Canadians aren’t planning on changing their investment strategy. Among Baby Boomers, that numbers jumps to 62 per cent.
"Nobody knows exactly when and how fast interest rates will rise, but Canadians need to understand the risk this poses to their retirement funds and plans," says CIBC Asset Management president Steve Geist in releasing the survey results.
"Canadians understand the impact that rising rates have on household expenses, such as mortgages and loans. But, it's equally important for Canadians, especially those approaching retirement and preparing to draw income from their portfolios, to be aware of the impact that rising rates can have on their investments."
Do you have the right asset allocation?
CIBC suggests investors check their portfolio to make sure they have the right asset mix for when interest rates do rise.
When that might be is increasingly unclear as Bank of Canada governor Stephen Poloz tries to figure out how to deal with stubbornly low inflation, while also forecasting an uptick in economic growth.
The benchmark interest rate has been unchanged at 1 per cent since 2010 and economy watchers are debating whether the next move will be a cut to help spur economic growth or an increase to cool inflation.
"With core inflation well below target, markets are increasingly pricing in a rate cut by the Bank of Canada," CIBC economist Benjamin said in a note last week.
That said, he and his colleagues expect inflation to increase as the Canadian economy picks up, spurred in part by improvements in the U.S.
"You cannot blame the Bank of Canada for losing sleep over low inflation," writes Tal, calling it a "headache" for Poloz. "But with the macro-economic picture and price competition in the retail sector inconsistent with such low inflation, and underlying CPI data suspiciously noisy, ultra-low core inflation might not be as persistent as the Bank fears."
TD economists Sonya Gulati and Leslie Preston believe the bank’s next move will be a hike but that it will be “a long way off," which they define as the second half of 2015.
That gives investors more time to procrastinate before changing their investment strategy.