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moneysense.ca, 26/10/06
Canada Savings Bonds
Canada Savings Bonds are currently on sale and offer 3% for the first year. The Premium bonds, which can be redeemed once a year on the anniversary of the issue date or the following 30 days, pay 3.15%, 3.25% and 3.35% during the first three years.
I have never purchased a Canada Savings Bond and most people I know prefer to park their money in a high-interest savings account or a money market fund. Given that demand for these bonds seems to be low, why does the government continue to spend taxpayer dollars to heavily promote them?
moneysense.ca, 26/10/06
They have lotteries to help people get rid of their capital for a huge amount of money, and they have Canada Savings Bonds to help the rest of them lose a little of their money.
Amazing to think anybody would buy into these.
Actually a lot of people buying CSB through their payroll programs.
For example, last month universities all over the country actively
promoted the bonds to their employees as “a safe place to put some
money aside for future major purchases or for their retirements”.
From other side taking into account high level of financial illiteracy among the population I wouldn’t be surprised if number of buyers is really big.
At least they are promoting saving money.
It’s easy to spend someone else money, specially when you don’t have to return them back.
Although CSB’s are not the best right now, they have in the past been very good investments, especially if you need something to act as collateral. When I was working as a contactor and my clients never every seemed to be able to pay me within the 30 days they were required (of course they were all the government contracts and no it wasn’t the “no work required” type of ad contracts from Public works), I purchased CSB’s to act as collateral for my line of credit so that I could keep my interest at prime.
Even better, for me at the time was the government was trying to get it’s books in order and thus they were trying to get as much money from the bond markets as they could, so the gave a staggered interest rate which went up from 3% in 1998(?) to 8.75% for 2006. Now that I don’t need the line of credit since I have a home equity line of credit, I’m going to cash in those bonds and put a nice big extra payment on the house.
The problem for CSB’s is that there is more choice for consumers so we can park our money in other venues, but for staight no frills investing CSB’s aren’t terrible, just not great but they are safe. I now do a payroll deduction just to put a little away for a rainy day.
As a federal employee they market these bonds to us pretry heavily. I know of quite of few of my co-workers who use the payroll deduction program. The only really good part about it is that with the payroll deduction the money never actually even touches your account. It is deducted at source just like your CPP/EI etc.. thats different than auto withdrawl from your account because that money actually hits your account and the temptation is there to use it for other purposes. Having said that a disciplined investor will do better looking elsewhere…you can get a five year GIC at over 5% today if you know where to look and really need safety in your savings.
The CSB program absolutely sucks! My parents used to talk me into buying CSBs when I was younger, but once I took the time to learn more about capital market, then pfft! Cashed them out!
As for the government’s perspective, why NOT keep it alive? Any CSBs they sell pays out less interest than ANY other government bonds, like T-Bills and bonds of any maturity. So, any CSBs they sell will reduce the amount of the higher interest bonds that they would have to sell in order to refinance their debt! Just like in personal finances, if you can get a lower interest rate from some other bank, why not go for it?
By the way, my comments do not necessarily apply to US Savings Bonds. Although the interest rate on their savings bonds is also lower than the Federal Reserve Rate, the advantage of their savings bonds is that the interest is tax deferred until you cash them out. So, you can essentially use their savings bonds like a retirement account – you cash them out in the future when you’re retired and your income is essentially zero. So you should end up paying a MUCH lower tax rate on your interest. Also, if you are hit by a disaster (like in New Orleans), then they let you cash them in with the interest completely tax-free!
If the Canadian Savings Bond program worked in this same manner, then it MIGHT actually be worth something. In its current state, the CSB program is absolute GARBAGE and it is the government taking advantage of our “unsophisticated” money saving public. Just like my parents… And I’m quite resentful of that, actually. Can you tell? ;0P
The CSB is marketed to people like me (45 married with kids) but the people who buy them are my parents who are 70-ish, and they buy them for their grandkids. I finally got my parents to put this money directly into my kids RESPs so that they got the initial growth from the government kick in.
CSBs are like lotteries, government Financial CRACK Cocaine. –C8j
I like CSBs better than the high interest savings accounts. For one, it’s a hassle to cash these paper bonds. With the savings account, I have access to it with a click of the mouse and the cash is in my chequing account. Yeah I’ve been getting better and it is matter of discipline, I also don’t like to trust doing financial transactions online. Although I had virus ware and spyware protection with Norton and AVG, I was still hacked and my savings account was emptied! (At least I only had $50 in it). With the paper bonds, it’s a matter of keeping the certificates in a safe place. No worries about hacking
Besides, when no people save whatsoever or invest their entire amount of money in the stock market, isn’t any savings in anything really better in the long run? I mean, the stock market could crash, housing market could falter, interest rates could rise, and any savings is better than none. Yeah I buy mutual funds and stock, but I keep some of my investments in cash and thus I buy CSBs.
I don’t know how it is in Canada but in the States you can get 5-5 1/2% on money market.
Is it possible to cash in an american savings bond in Canda? If not, does anybody know how one would go about doing it?
James,
While it is true the money is deducted at source, there are a lot of other ways to get the same thing. As per CRA rules, you can have your employer designate an amount that will not have any deductions applied to it as you would be putting it directly into an RRSP. So you do that with pre-tax money and not get a huge refund (which is a cheap loan to the govt) many months later. Use form T1213 – when I did it many years ago, I had to write a letter and Revenue Canada (as they were known) gave me a letter to give to my employer. Much easier now!
http://www.efficientmarket.ca/article/Reduce-Tax-Withheld
Canada Savings Bonds are definitely attractive. In the last 6 months we have discovered that banks and brokerages can easily collapse. Government bonds held for you at a brokerage still depend on the broker in several ways: you trust that there is no fraud and the broker actually holds a bond for YOU; you trust that the bond is not being loaned out in securities lending; you trust that if the bank/broker collapses, CIPF will speedily process an insurance claim and get your bond back to you. With Canada Savings Bonds you aren’t exposed to any of this middleman risk. In most cases with CSB, you are the certified owner of the bond and you directly hold the bond. This is worth something. I am an expert in bond markets and I still hold CSB (mostly because I don’t trust the banks, brokerages, or CIPF).
I’m researching the benefits of CSBs and so far it seems there’s only one reason to get them. Please let me summarise and correct me if I’m mistaken:
CSBs are good because people have no self-control and can’t resist spending their money as long as it’s available to them.
Is that it?
Pretty much Livia, that’s the only reason I can see as well. Plus they are offered through payroll deductions so people don’t have to go through the hassle of opening a bank account and setting up an automatic savings plan. So people are lazy and also have no self control.
You are much better off with a savings account, or better, a tax free savings account.
A few months ago, I would have echoed 14 of the 15 comments made here. However, do not dismiss the comments of Perpetual Bull. Ask your broker if you bonds (and everything else) are held in “nominee name” or “client name.” Then search for “BIA” and the Marlow case — and find out everything you can about what you think you own…
@Change of Heart: Thank you so much for pointing me to the Marlow Case. I found a good write up here
http://www.farberfinancialgroup.com/uploads/rebuilding%20success%20Spring%2009%20AN.pdf
and will write about it in the future. Though that article mentions that CIPF offers some protection, Perpetual Bull’s point is a valid one. I never realized the importance of holding investments in my name, not the street name.
See also these threads:
http://www.financialwebring.org/forum/viewtopic.php?f=35&t=111313
and http://www.financialwebring.org/forum/viewtopic.php?f=35&t=110143
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