Market Commentary

Market Commentary - February 20, 2015

Good Morning,

Canada Housing Trust disappointed lenders on Wednesday when the 10 year CMB deal was announced as a $1.5 billion transaction (down from the typical $2.0 billion).  As a result, the available funding allocated to participating lenders was cut to the lowest level EVER (or at least that I can recall, and I’m not always sure what day it is, so don’t quote me).  Indications from the dealer syndicate were that the investors just weren’t putting their hands up and they had difficulty selling the bonds.  One explanation is that given the extraordinarily low rate environment some investors are reaching for yield by rolling down the credit curve a bit…buying provincials and corporates (which continue to fly off the shelves) in search of a few extra basis points.  Sound investing?  Time will tell.  On the plus side, by cutting the issue size rather than forcing the deal through, the new issue spread held in well.  In fact, the bond was priced 3.5bps tighter to the GoC benchmark than when it was first launched in November.  The bad news is that some lenders may view their 10yr CMB funding as more scarce going forward.  This could put some upward pressure on CMHC insured spreads.   Sorry…just sayin’. 

Also of note in the commercial mortgage space is the announcement of the next IMC CMBS transaction.  IMC is on the road with syndicate lead RBC marketing the  $325 million issue this week.  The transaction will be a typical senior/subordinate sequential pay pass-through structure and features $208 million AAA 5.5 year and $73 million AAA 10 year classes.  Indicative spreads are flat to +5bps to the last Canadian CMBS transaction in November, which is encouraging given the context of the market overall.  More on this transaction as it develops.

In broader news this week, oil dipped below $50 and the TSX ended a 6 day winning streak on Wednesday.  Oil prices succumbed to a huge jump in US oil inventories.  The Saudi’s aren’t helping matters either…they’re putting the proverbial hose in the market’s mouth by increasing production even further.  Also on Wednesday, soft US economic data and surprisingly DOVISH Fed minutes offered some support to bonds after a bit of a sell-off on Tuesday.  (For those of you who have forgotten, a ‘dovish’ central bank is less concerned about inflation and more concerned about economic growth.  If the market interprets FED or Bank of Canada comments as ‘dovish’ they will BUY bonds and yields will fall in support of accommodative monetary policy.  A central bank that is concerned about inflation getting too high will be said to be ‘Hawkish’). 

In up to the minute news, Canadian retail sales figures reported this morning fell at the fastest pace in more than four years.  Sales fell 2.0% in December compared to a projected decrease of only 0.4%.  The report suggests consumer confidence may be deteriorating along with oil prices.  The weakness is negative for the C$ and supportive for fixed income.  In fact, the news has given legs to the bond rally and yields have fallen as much as 8bps across the curve in early trading today. 

Lots of other stuff happened this week too, but those are highlights and probably just enough to impress your friends in the buffet line at Mandarin this weekend.

Kung Hei Fat Choy,
Treasury Guy

by First National Financial LP 20. February 2015 09:56

Financing done right - The case study - February 18, 2015

Supporting start-up entrepreneur

Client Objective: build and grow new real estate business
An experienced real estate executive wanted to strike out on his own and start a new business but needed help structuring the business, establishing legacy and building equity.

First National Solution: business building, capital structuring, equity partnering
A custom deal on every level, First National experts provided advice on structuring the new venture so that it was financeable and guided the client on the selection and management of an institutional equity partner. Since incorporating the business almost 10 years ago, the client has developed more than 30 properties.

The First National Approach: clients for life
First National has been a part of the client's business evolution, from inception to growth, and continues to provide expertise and guidance that goes beyond simply financing. Working together in partnership, First National and the client have pursued and achieved aggressive growth, surpassing what is usually possible in seniors housing in Canada. 

by First National Financial LP 18. February 2015 11:32

Market Commentary - February 13, 2015


I’m writing to you on Thursday evening as tomorrow I will be on my way to Collingwood with Mrs. Treasury and the kids to spend the weekend in a massively overpriced hotel room to ski in unbearably cold temperatures.   I see a lot of ‘special’ coffee in my future.  If you were planning on setting the rate on a mortgage Friday, don’t forget that bond markets close early for the long weekend.  All work and no play makes bond traders grumpy. 

It had been one of the least volatile weeks in recent memory until today.  Following this morning’s economic data, one treasury trader was quoted as saying “Retail sales weakness was a catalyst…bottom line is we are working on an outside day up and candlestick reversal across the curve”.  Don’t ask, I’d be lying if I told you I knew what he was talking about.  In plain English, US retail sales data (even ex-gas/auto) came in well below expectations this morning and bonds have rallied (yields lower) in response.  In fact, 5 and 10 year yields fell 6bps today and we will go into Friday 8bps lower than last week at 0.70% and 1.40% respectively.  (still higher than the lows set back on Feb 2nd of 0.58% and 1.23%) 

Next week Canada Housing Trust will launch the 2nd opening of the “10 year” March 2025 CMB bond along with a 5yr Floating Rate Note.  Expect to see the March 2025 maturity one more time in May  (fix your rates by May 1st for that one).  Assuming Canada Housing Trust keeps to their cycle, a new “10 year” maturity of December 2025 will be introduced in August.  Don’t worry about taking notes…I’ll remind you again before then. 

Happy Family Day,

Treasury Guy.

Jason Ellis
Managing Director, Capital Markets

by First National Financial LP 13. February 2015 10:08

February 6, 2015

Good morning Canadian real estate investors,

You'll have to forgive me if I'm brief today. I'm still sobering up from the sunshine and tequila after a few days in Mexico with some of our residential mortgage broker friends. (I'm available for speaking engagements anywhere they put umbrellas in your drink). Your souvenir 'Senor Frog' t-shirts are in the mail.

As I sit down to write this, Canadian and US employment data has just been released, and it looks pretty good. US payrolls maintained their recent trend in January, and this time employment growth was accompanied by an acceleration in wages. In addition to 257,000 new jobs, there was a massive upward revision of 147,000 jobs to the prior two months. Most significant to Fed policy though, is that wages rebounded after very weak figures in December. Could a June 'rate lift-off' be back in play for the Fed? Maybe. 

Meanwhile, Canada's job numbers were good too (+35,000 versus forecast of +5,000), but with a tilt toward part-time and self-employed positions making the result a little more ambiguous. Could the Bank of Canada still cut rates in March? Maybe.

As you would expect, the bond market is selling off on the positive employment news and yields are up 3-5bps across the curve in early trading. This move takes the 5yr Canada bond back to a yield of 0.75%, which is more than 15 basis points higher than where we started the week. The 10yr Canada bond has seen a similar move, and is now yielding 1.39% relative to 1.23% on Monday.

In funding news, issuers are preparing for the 10yr CMB this month, and things are shaping up well. Congratulations for choosing First National and the Canada Mortgage Bond for your 10yr mortgage funding needs. You've chosen wisely.

Hasta la Vista, Treasury Guy

Jason Ellis
Managing Director, Capital Markets

by First National Financial LP 6. February 2015 10:03

Market Commentary - January 30, 2015

Well, another week, and another 10-12bps gone, but who’s counting.  At this rate we’ll have negative rates in Canada for Valentine’s Day.

I’ve always thought context is always important, and I’m quickly losing it, so maybe a quick review of what rates have done recently is in order.  Remember Christmas?  When we went home on the 24th for a nice turkey dinner and the airing of grievances (for those of us celebrating Festivus), the 5yr Canada benchmark bond was yielding 1.44%.  As I write this, the same bond is yielding a touch under 0.65%.  The yield is literally less than HALF of what it was.  Over the same time, the 10yr benchmark has fallen from 2.02% to 1.30%. 

The interesting thing about where rates are now, is that it makes for a compelling sales pitch as a 5 year NHA-MBS issuer.  Sell your government bonds and buy a government guaranteed ‘AAA’ rated NHA-MBS pool for DOUBLE the yield.  It’s true.  You can earn 100% more interest by owning NHA MBS relative to bonds.  (No, I can’t sell them to you for your RRSP contribution).  You’d think my phone would be ringing off the hook though, but the credit market is still a bit wobbly, and unfortunately, NHA-MBS still lacks the liquidity investors crave during times like these.  Nonetheless, CMB and MBS spreads have held in reasonably well over the last few weeks, but for reasons that escape me, provincial spreads have actually outperformed CMB’s by several basis points.  

The action in the bond market this week was most volatile on Tuesday when very weak US Durable goods orders sent bond yields tumbling 10 basis points until a couple of hours later the US Consumer Confidence index came in well above expectations.  In fact, at 102.9 (vs 95.5 expected) it was the most confident US consumers have been since 2007.  I’m still trying to figure out why all these confident consumers weren’t out there buying Dishwashers, Refrigerators and other durable goods.  The bond market didn’t let this little oxymoron put them off though.  Bonds came crashing back to earth and we ended Tuesday with yields only modestly lower.

The market focus on Wednesday was the US FOMC rate announcement and related statement.  The Fed left rates at 0% as expected and said that economic activity is expanding at a ‘solid’ pace (was ‘moderate’ in the last statement) and job gains are ‘strong’ (was ‘solid’) and they describe current low inflation as ‘largely’ due to weaker energy prices (was ‘partly’).  The fed also added that they are monitoring ‘international developments’.  What does all that subtlety mean?  I haven’t any idea, but the market clearly understood and the reaction was unambiguous.  The rate market rallied hard and the curve continued to flatten.  Equities sold off and oil was crushed back by about 4%.  

But hold on!  Great news on the jobless front.  US initial claims fell…a lot…on Thursday.  First-time claims hit a new 15-year low.  Seriously.  Continuing claims also fell.  Did bonds sell off on this.  No. They did not.  They continued to rally.  Rates ended lower again.

ANYWAY, let’s talk about the Bank of Canada for a minute.   After cutting interest rates by 25bps, Governor Poloz said that the ‘drop in oil prices is unambiguously negative for the Canadian economy’.  The cut was sold as an ‘insurance’ move against oil prices should the expected offsetting positives (consumer spending, exports etc.) take longer to develop.  Well, the only big  news out of Canada this week was that Statistics Canada released labour market revisions on Wednesday that slashed 2014 job gains by more than a third.  I’m betting my son’s grade 9 social studies class could have done a better job than StatsCan.  This is, of course, evidence of the employment weakness that policy makers including Poloz believe indicate material slack in the economy.  Derivative contracts on short term interest rates are now pricing in an almost 60% chance of another 25bp rate cut in on March 4th.  (and a 60% chance that banks will cut prime by 60% of that…just kidding…I’m pretty sure the banks will be quick about matching the next 25bps). 

I’ll drop in an update on GDP data in the morning, but for now I’m off to the Leaf game, paying for sins committed in another lifetime I expect.  GO LEA….oh, forget it. 

Jason Ellis
Managing Director, Capital Markets

by First National Financial LP 30. January 2015 12:06

January 23, 2015

Good morning. Apologies for the lateness of today's posting, but I've only just returned from a Financial Services Regulatory Conference. Good times. I really only go for the free danishes.

Anyway, a couple of important updates since the Bank of Canada's shocking decision to drop rates.

First, as you probably have noticed by now, the big banks have not followed the BoC lead and have left Prime rates unchanged at 3.00%. An article in Bloomberg suggested that the failure by the banks to reduce Prime would 'raise the ire of the Bank of Canada since the rate decline would not flow through into consumer lending rates. In truth, I bet this is EXACTLY what the BoC wanted. I don't imagine this rate cut was intended to make mortgages, car loans, or lines of credit any cheaper. It has, however, had the desired effect on the Canadian dollar which will be supportive of manufacturing and exports.

The good news for our commercial borrowers is that your insured construction or adjustable rate mortgage is based on our Asset Backed Commercial Paper cost of funds, which is closely tied to BA's, which did fall about 25bps in sympathy with the BoC rate. It will take a couple of months for the decrease to filter through as older paper matures and new paper is issued at prevailing rates, but our insured floating rate cost of funds will reflect the change in rates.

Second, in the press conference that followed, Governor Poloz noted that the Bank could take out more insurance in the form of another rate cut should the outlook deteriorate further. The key wildcard remains the price of oil. It is now very possible that the bank will follow through with another 25bps rate cut as early as March before moving to the sidelines.

Oh right. One more thing. Super Mario and the ECB announced its Quantitative Easing (QE) program. Too early to really say how this impacts our world, but it certainly adds a new dynamic to the markets.

Bond yields have been range bound the last couple of days and continue to trade around the levels they plummeted to on Wednesday. I'll try my best to keep you posted but hold on tight in the meantime, because it's going to be a *&%$* bumpy ride!

Jason Ellis
Managing Director, Capital Markets

by First National Financial LP 25. January 2015 19:47

Market Commentary - January 21, 2015

Bank of Canada cuts the overnight rate from 1.00% to 0.75%.

Responding to concerns about the impact of cheaper oil on growth and inflation prospects, the Bank of Canada cut its overnight target by 25bps to 0.75% this morning. The last change in the overnight rate was in September 2010 when the rate moved up from 0.75% to 1.00%.

The surprisingly dovish statement stresses the downside risks to both the inflation profile and financial stability from energy market developments. This surprise move (none of the surveyed economists anticipated this) is intended to provided insurance against these risks. Obviously, very negative for the C$ and very positive for fixed income. CAD now trading at 1.2358 vs the US dollar (up 2.5 cents). The curve has steepened this morning with 2 year bond yields down 26pbs, 5 year bonds yields down 19bps and 10 year bond yields down 5bps.

All of this, of course is against the backdrop of a very challenging credit environment and changes in sovereign bond rates will not necessarily translate into cheap credit. Still no word on Prime rate, but the last time the Bank of Canada cut rates by 75bps in 2008, the banks only lowered Prime by 50bps, taking the Prime-Bank Rate basis from 1.75% to 2.00%. We'll have to wait and see what the banks do, but I expect Prime will be reduced to 2.75%. I expect fixed mortgage rates and other consumer lending rates to be more sticky though. (Bank stocks are up sharply, by the way).

Commercial mortgage spreads have been trending up over the last 30 days from a low in the fourth quarter of 2014 at approximately 160 – 170 basis points over Canada's to 190 to 200 over Canada's for 5 year product. 10 year spreads have moved in a similar fashion to 210 to 220 basis points over Canada's. This is consistent with increases in other credit products such as corporate bonds and bank deposit notes. For example, First Capital Realty Inc. issued a 10 year unsecured debenture yesterday at a spread equivalent of 213 over Canada's. We would expect to see floor rates used by most lenders to protect their all in coupons from further bond spread compression.

Jason Ellis
Managing Director, Capital Markets
First National Financial LP

by First National Financial LP 21. January 2015 21:32

Financing a 50% vacant building

Financing done right - a case study 

Client Objective: building purchase and renovation
A long-standing First National client that was looking to build its portfolio in a specific geography purchased a building that was 50 per cent vacant, with the goal of renovating it and increasing its value.

The First National Solution: interim financing and CMHC loan
First National provided a loan that was 85 per cent of the acquisition price right away and allowed the financing necessary to enable the renovation as well. Once the renovation was complete and the building was full, First National secured a CMHC loan within 8 months of acquisition.

The First National Approach: obstacles as opportunities
Considered high risk by most lenders because of the vacancy rate, First National never questioned the viability of deal. Having done deals similar to this one with the client, the First National team knew that First National’s ability to take smart risks, ingenuity and nimbleness and the client’s real estate legacy combined would make the deal quick and straightforward

by First National Financial LP 21. January 2015 10:42

Janaury 16, 2015

Where to begin?  I’m not sure I have the words.  Bond yields in Canada reached record lows (again) on Thursday afternoon as investors fled to the safety of fixed income amid tumbling commodity and stock prices and signs of poor global growth.  Bond yields fell a full 10 basis points on Thursday alone, and are close  to 25 basis points lower since this time last week.  Why the big rally in bonds yesterday?  There are a lot of reasons, but we can sum it up in two words…”The Swiss”.   The Swiss National Bank roiled markets worldwide with its surprise decision to abandon the Franc’s cap against the Euro.  SNB also lowered its already negative deposit rate from -0.25% to -0.75%.  Despite the drop in deposit rates, the Franc appreciated 23% against the Euro on the day.  Sadly, that Rolex you’ve had your eye just got a lot more expensive…

In other upbeat news, a real estate research piece from Deutsche Bank  that has been making the rounds highlights Canada as the most overvalued real estate market in the world.  According the analysis, our housing market is more the 60% above fair value.  No doubt the German analyst who wrote the piece felt a warm, comforting sense of schadenfreude.  If you didn’t already know, schadenfreude is uniquely German word to describe the pleasure derived from another person’s misfortune.   

Lastly, back on Monday the Bank of Canada Business Outlook Survey (or BOCBOS for fun) showed that business sales optimism fell to its lowest level since 2012.  Then, on Tuesday, Bank of Canada deputy governor Timothy Lane said that lower oil prices are likely to be bad for Canada (duh) and may delay the economy’s return to its production potential.  Any gains from lower prices for consumers will be more than reversed over time as lower incomes from oil spill over to the rest of the economy.   Oh yeah, and Target and Sony are packing up and leaving Canada.  In fact, the sell orders are piling up on Canada as Bank of America and Fidelity Investments are publicly betting against the currency, equities and even (gasp) our bank stocks as oil continues its plunge.  

All that AND the Leafs are now firmly out of the playoff picture.  At least it’s Friday.

Up to the minute update: U.S consumer prices recorded their biggest decline in six years this morning, which could bolster the case for delaying the first interest rate increase from the Federal Reserve.  CPI fell 0.4%.  While Fed officials view the energy-driven inflation weakness as transitory, darkening prospects for the global economy and a strong dollar will complicate matters for the U.S. central bank. 

by First National Financial LP 16. January 2015 09:58

January 9, 2015

Happy New Year.  After an extended break and two rounds of antibiotics, we’re back.

It’s been a roller coaster ride between my last post and today, but that’s history,  so let’s skip forward to what happened this morning with US and Canadian employment data.   Canada’s numbers were quite soft with net change in employment down 4,300, but the details are generally better than the headline would suggest with full time jobs actually up 54,000.  US Payroll figures were stronger than expected with a headline gain of 252,000 jobs and a strong revision upward of last month’s number.  The bond market is still making up its mind this morning, and for the first time in a while, rates are actually relatively unchanged in early trading.  The 5 and 10yr GoC benchmarks (Sep 2019 and Jun 2024) are trading around 1.25% and 1.70% respectively (or about 15bps lower than my last post on December 18th).  If you need context, I would describe those are as VERY low rates.  Not as low as rates in Germany though.  The 5yr Bundesobligationen currently trades just at touch under 0%.  Not a great return for the investor, but at least you get to say ‘Bundesobligationen’.  If that wasn’t enough fun, if you’re willing to accept a rate of -0.10%, you could own the 2yr Bundesschatzanweisungen. 

Good Luck in 2015.

by First National Financial LP 9. January 2015 13:47