Canada Savings Bonds to pay 0.5% in 1st year

Canada Savings Bonds go on sale across Canada today with a new focus on payroll savings plans, shorter maturity dates, andthe usual rock-bottom interest rates the bonds have lately been known for.

The new issue of CSBs pays just 0.5 per cent interest in the first yeara rate that is easily topped by quite a few non-governmental financial competitors.Several online banks pay up to two per cent intereston their daily interest savings accountsoften with no minimum balance required.

From now on, CSBs will be sold exclusively through payroll savings plans. The vast majority of CSBs about 95 per cent are sold through payroll deduction plans at work. Almost a million Canadians sign up to buy savings bonds this wayat 11,500 workplaces.

Anyone wanting to buy bonds through financial institutions or investment dealers will now have to buy Canada Premium Bonds (CPBs). Premium bonds pay a higher rate of interest1.00 per cent in the first year, 1.20 per cent in the second year, and 1.40 per cent in the third year.That produces an uninspiring average annual compound interest rate of 1.19 per cent, which is just below the current inflation rate.

Premium bonds used to be cashable only on their anniversary dates or 30 days after.They can now be cashed anytime, but will only pay interest up to the last anniversary date. "In an environment of increasing competition and low interest rates, the CPB has been enhanced with a new cashability feature in order to offer a more flexible product," a government release said.

In another policy change, all new Canada Savings Bonds and Canada Premium Bonds will mature in just three years. The old bonds featured a 10-year maturity.

Back in 2004,Ottawa was presented with a consultants report that recommended the CSB program be wound down, saying the move could save $650 million over nine years.But the Liberal government at the time rejected that and the Conservatives have kept bond salesgoing.

Canadians currently have about $9 billion sitting in Canada Savings Bonds and Canada Premium Bonds. Twenty years ago, that figure was over $30 billion.

Bond redemptions havebeen outpacing sales for years as financial institutions offered higher interest rates and easy ways of saving online. But the ease and convenience of payroll savings plans at work still attracts enough interest to keepCanada's best-known investment productgoing.