Bonds vs GICs: Where to Invest Your Fixed-Income Money

After a long pause, fixed income is regaining attention. Recent declines in interest rates following two years of hikes have delivered welcome capital gains for bond investors while still providing attractive income yields. At the same time, renewed volatility in equity markets underscores the value of diversification and has many investors re-evaluating where they hold cash and safer assets.

“High-interest savings account (HISA) rates are beginning to fall,” says Travis Koivula, an investment advisor with Aviso Wealth in Victoria. As HISAs become less appealing, clients increasingly ask whether it makes sense to shift some savings into traditional fixed income products such as bonds or guaranteed investment certificates (GICs).

The recent shift follows a long period of disappointing returns for fixed income. The low interest-rate environment of the 2010s pushed bond and GIC yields to minimal levels, and at one point in 2019 many bonds worldwide even carried negative yields. When inflation surged and central banks raised rates in 2022, bond prices fell sharply.

Today, yields on bonds and GICs look more attractive, and the prospect of lower interest rates ahead has improved the risk-adjusted outlook for these assets. GIC investors are rushing to lock in multi-year rates before they decline, and fund flows suggest many investors are rotating back into fixed income for safety and income.

How interest rates affect bonds and GICs

Interest-rate movements drive bond prices: when interest rates rise, existing bonds with lower coupons fall in price because newly issued bonds offer higher yields. That price adjustment equalizes the yield to maturity across comparable securities. GICs, however, are not traded in secondary markets—so their contract value remains fixed until maturity. A GIC paying a lower rate simply becomes less attractive relative to new issues.

What fixed income means and how to invest

If you’re deciding how to allocate cash, you can choose between individual bonds, bond funds or GICs. Each option has distinct advantages and trade-offs in liquidity, complexity, cost and risk.

Individual bonds

Buying individual government or corporate bonds is similar to holding a cashable GIC: you can hold the bond to maturity to receive principal and interest, or sell it on the secondary market if you need access to funds. The interest rate paid by the bond stays fixed, but the bond’s market price will fluctuate with interest-rate changes—especially for long-term bonds.

Bond funds

Most retail investors gain exposure to bonds through bond mutual funds or bond exchange-traded funds (ETFs). These funds offer broad diversification and professional management, and they trade easily on broker platforms. The trade-off is exposure to market volatility—fund values can decline if rates rise—and management fees, which are typically low for ETFs but can reduce net returns.

GICs

GICs are among the safest debt investments available in Canada because they are protected by deposit insurance, usually up to $100,000 per depositor at a given institution. Some credit unions offer different guarantees. The primary downside is illiquidity: most GICs require you to lock your money in for a set term, commonly from 120 days to five years. Cashable GICs exist but generally pay lower rates.

Key considerations when choosing bonds or GICs

Koivula highlights liquidity and simplicity as the most common decision drivers. If you buy a five-year GIC, your money is tied up and you lose flexibility. If you anticipate needing funds for emergencies or to rebalance into equities during a market dip, bonds or bond funds offer more access.

Individual bonds can be complex: a single issuer may have numerous bond issues with different maturities, coupons and covenants. That complexity is why many investors prefer bond funds, which simplify exposure across many issues. However, some investors dislike the price volatility of bond funds and prefer the certainty of holding a single bond to maturity, which returns principal and coupon payments unless the issuer defaults.

An alternative for those who want lower volatility within funds is a target-maturity bond fund, which holds bonds that all mature around the same date, reducing duration risk over time.

Should you buy bonds or GICs?

Several factors can help tilt the choice toward one product or the other.

Diversification benefits

GICs are uncorrelated with equities, but bonds have historically been negatively correlated with stocks, meaning bond prices often rise when equities fall. Bond funds can also include foreign-denominated debt, offering currency diversification—useful when Canadian markets decline and the U.S. dollar strengthens.

Tax efficiency

Interest income from most fixed-income investments is fully taxable in non-registered accounts. Some strategies—such as buying discount bonds or funds that deliver much of their return as capital gains—can offer more favorable tax treatment, since capital gains are taxed more lightly than interest income.

Risk tolerance

If preserving capital is your top priority, GICs provide the greatest certainty because they are guaranteed and immune to market price swings. If you can tolerate some volatility for higher potential returns or diversification benefits, bond funds or individual bonds may be preferable.

Conclusion: Which fixed-income option is right for you?

Choosing between GICs, individual bonds and bond funds depends on your priorities: liquidity, simplicity, tax position, diversification goals and risk tolerance. GICs are best for capital preservation and certainty, while bonds and bond funds offer greater flexibility, diversification and the potential to respond to market opportunities. Consider your financial goals, how long you can lock away funds, and whether you prefer professional management or direct control when deciding where to allocate your fixed-income allocation.

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