Market Commentary

Market Commentary - July 3 2015


More than few vacation plans were dashed this week with the failure of Greek debt negotiations on Saturday.  With the July 1st Canada Day and July 4th Independence Day holidays this week, it was an ideal week for traders to book off…on paper any way.

When it became apparent negotiations would fail, Greek PM Alexis Tsipras took to the TV and called the European Union leaders “extremist conservative forces” and called for a referendum next Sunday on the bailout package.  For their part, creditors and euro zone finance ministers announced that no more negotiations will be held ahead of the referendum.

The news put the markets firmly into ‘risk-off’ mode and Government bonds rallied sharply on Monday and Tuesday with yields ending 20bps lower heading into Canada Day. 

Also contributing to the rally on Tuesday, April GDP fell another 0.1% reflecting continued weakness in the energy sector.  The data failed to show any strength in manufacturing or consumer spending.  Apparently the hit from lower oil prices to the economy might not be as ‘front-loaded’ as BoC Governor Poloz had hoped.

US Non-Farm Payroll data were released on Thursday (ahead of the July 4th holiday) and while the numbers didn’t necessarily disappoint, they didn’t inspire any confidence either.  Payrolls increased by 223,000 against consensus of 233,000.  More significantly, wages were flat month over month.  All told no much to get excited about.

The Bottom Line:  The events in Greece and the luck-luster US employment data make a September rate hike by the Fed less likely.  With the Fed possibly on hold and disappointing GDP data, we can expect increased pressure on the Bank of Canada to take out additional ‘insurance’ in the form of another rate cut in 2015.  In fact, the implied probability of a 25bp rate cut at the July 15th meeting has jumped from <10% a week ago to >35% today.

In Toronto news, the Pan Am games are just around the corner.  Tickets for the gold medal basketball game have sold out, but if you can believe it, there are still plenty of tickets for Roller Figure Skating and Bowling.   So that’s good.

Anyway…the Greek thing is on hold until Sunday and the US market is closed today, so my best advice is to send us your deals early and get to a patio!


Jason Ellis, Treasury Guy

Managing Director, Capital Markets

by First National Financial LP 3. July 2015 09:56

Market Commentary - June 26 2015


The summer solstice came and went last weekend and the days are getting shorter now.  I can already feel a Vitamin D deficiency coming on.

Days getting shorter makes me think about running out of time, as in Greece is running out time before its Eurozone creditors start sending guys called Guido with baseball bats to start collecting.  The drama in Greece is dominating headlines and becoming a serious distraction and concern for financial markets.  To that end, it seems like a good time to provide a little background on the situation in case you were interested.  Feel free to skip it if you don’t give a Souvlaki. 

Greece is struggling to pay its debt.  If Greece goes bankrupt and/or decides to leave the 19-nation Eurozone, the situation could create instability in the region that could have global implications.

The story begins in 2008 with the liquidity crisis.  With global markets in turmoil Greece announced that it had been understating its deficit for years which effectively shut it off from borrowing.  By the spring of 2010 it was close to bankruptcy and threatened to set off a new financial crisis.

The International Monetary Fund (“IMF”), the European Central Bank (“ECB”), and the European Commission, together “the Troika”, bailed out Greece (twice) at a cost of 240 billion euros (or the equivalent of 4.5 quadrillion Vietnamese Dong if you were curious).   The bailouts came with conditions though.  Lenders imposed severe austerity terms requiring budget cuts and revised pensions.  Most significantly, Greece would actually have to start paying and collecting taxes.  

The bailout was meant to stabilize Greek finances, but Greece’s economy has only deteriorated since then with unemployment now around 25%.   Many have argued that the austerity measures are to blame.  The creditors however, argue that Greece has failed to conduct the kind of economic overhaul required.  

The left wing party call SYRIZA (an acronym for a long Greek name meaning Coalition of the Radical Left) came to power this year on a platform that rejected the austerity measures.  Greece seems willing to play chicken with its creditors, believing a compromise will be reached in order to avoid the uncertain consequences of a default. 

In any event, if Greece doesn’t get money soon, decisions will have to be made about leaving the Eurozone or entertaining offers from Russia and China for help.  Greece faces imminent default if it fails to make a 1.6 billion euro payment on Monday.  Meetings with EU creditors are set for tomorrow.  Right now, the markets seem to be counting on a resolution of some kind.  UK bookmakers have the probability of a Greek exit (or “Grexit”) by the end of the year at less than 20%.  Seriously…you can bet on it if you want to.

ANYWAY, closer to home bonds quickly erased last week’s rally on Monday when a brief moment of Greek optimism gave the market some confidence and took yields higher.  Strong US home sales data helped too.   5 year GoCs jumped 8 basis points on the day and have traded in a range since then.  10 year yields had a similar move.  Currently, 5’s and 10’s are yielding 1.02% and 1.86%, or 26bps and 51bps higher respectively than March 31st.  That’s a considerable steepening of the yield curve this quarter.

In securitization news, Bank of America Merrill Lynch brought $250 million 5-year NHA MBS that was upsized on demand to $410 million.  Sort of good news except there were fewer than 10 buyers and all received close to full fills.  Pricing included some new issue concession, but the bonds have not rallied in secondary trading.  So not great.  CMB spreads are mostly unchanged this week.

In corporate bonds, Kraft Canada Inc. priced $1 billion of debt across 3 tranches following a successful deal in the US.  Apparently investors don’t care that Kraft Dinner is less orange than it used to be. 

Lastly, somewhat inconveniently, Canada Day (also the birthday of Alan Ruck…aka Ferris Bueller’s best friend Cameron) falls on Wednesday this year, so a long weekend seems unlikely unless you happen to pick up a rare 48 hour flu.  Here’s hoping. 

Treasury Guy.

Jason Ellis

Managing Director, Capital Markets

by First National Financial LP 26. June 2015 11:38

Financing Done Right - Case Study

Client Objective: get optimum financing despite negative cash flow

Like most, this client wanted to get its desired loan amount, at a low rate, as quickly as possible. However, the building in question was not fully leased, adding the complexity of negative cash flow to the deal.

The First National Solution: one lender, inventive solution

To get to the client's desired loan amount, the First National team structured a high leverage deal, tapping the First National mixed fund and investor network. Despite the complexity inherent in the deal, the client experienced swift, seamless action and a decreased cost of borrowing ($300,000 during a 12-month period).

The First National Approach: executing on what's promised

The First National team relied on First National's strengths – seamless execution, investors, balance sheet and mixed fund -- to deliver on the client's objectives. Structuring a deal like this required the expertise of the larger team to fit it all together and make it work. 

by First National Financial LP 10. June 2015 14:55

Market Commentary - May 29, 2015


Monday was a non-event with markets closed in London and NYC and most Canadian fixed income traders (including yours truly) 'on course'. Tuesday saw a slew of second tier US reports on durable goods, new home sales, housing prices, and consumer confidence. Durable goods orders fell in line with expectations, but core shipments jumped for the second consecutive month. Consumer confidence was good, but not great. No Canadian data ahead of the BoC meeting on Wednesday. Yields fall about 5bps on the day and 5yr GoCs finish below 1.00% for the first time since end of April.

Focus on Wednesday was the BoC rate announcement and related statement. The bank delivered exactly what the market expected…no change in rates and comments that give the market no reason to alter views that rates are (probably) on hold for the rest of the year (unless they're not). To be honest, the statement had a real mix of positive and negative signals. At the margin, it might have left the market a little more dovish (less worried about inflation). Like the US, monetary policy for the balance of 2015 remains very data dependent, and central banks may swing from Dovish to Hawkish and back again before we're done. Yields fell another 4bps on the day.

GDP releases in Canada and the US had the markets full attention this morning. Canadian real GDP was overall weaker than expected, and will keep speculation about another rate cut alive. In the US, an already weak Q1 GDP number was revised down into negative territory. This revision, however, was expected and market reaction should be muted. Nonetheless, the uninspiring GDP news combined with continued uncertainties surrounding Greece, have put the market in a mood to buy (ie: take yields lower). Yields are down yet another 4bps this morning.

All told, the 5yr GoC benchmark (1.50% Mar 2020) yield is now 0.92%, about 13bps lower since we closed the books last Friday. The 10yr (2.25% Jun 2025) is at 1.63%, down about 14bps. CMB spreads are about half a basis point wider on the week but have outperformed weaker risk assets.

In mortgage insurance news, CMHC's market share is down to a record low 50% of new residential mortgages. CMHC CEO Evan Siddall said that after several years of cutting its share to reduce taxpayer risk to the mortgage market, the agency plans to hold on to the market share it has left. (For context, CMHC had about 90% share prior to the liquidity crisis). CMHC is now comfortably below the $600 billion insurance cap, and should have lots of room for new commercial multi-family lending going forward…in case you were worried about that.

Finally, if you happen to be in Nepal, happy Ganatantra Diwas Day! Enjoy the long weekend. 

Jason Ellis, Treasury Guy
Managing Director, Capital Markets

by First National Financial LP 29. May 2015 10:24

Financing Done Right

Client Objective: build two condo towers simultaneously

A long-standing First National client was transitioning from industrial to condo development and wanted to build two towers simultaneously. The first tower was 75 per cent sold, but the second was only 40 per cent sold, creating a challenge in securing financing.

The First National Solution: security-based financing

he client was looking to secure $18 million to fund the second tower. The First National team delivered this amount by creating a facility that leveraged security from six industrial buildings and five condo units within the client's existing portfolio.

The First National Approach: service, expertise, speed

The First National team applied ingenuity to create a facility that provided ample funds yet was easy to draw on. It took a deep level of understanding of the client and the investor to structure the right deal that made sense for both parties.


Check out the latest news, insights, and opportunities from First National Financial LP. https://www.linkedin.com/company/first-national-financial-lp

by First National Financial LP 26. May 2015 11:23

Event Report - Apartment Symposium

Developers, lenders, brokers, service providers, builders and more gathered to discuss the apartment and student housing markets and the burgeoning opportunities in new construction.

Andrew Drexler, Assistant Vice President of Commercial Financing at First National sat on a financing panel. He shares key insights by highlighting points he agreed with and where his opinions differed.

Agreed: new construction is definitely happening, but…

It is true that there is a lot of construction happening right now, but I’m not sure that the high-end market is as deep as it is perceived to be. In areas like Toronto, high rises are expensive to build so rents have to be high. I caution people to really understand their markets and be honest about whether the market is deep enough to support that supply.

A typical high rise takes two to three years to build, and most owners start leasing six months prior to project completion. In these scenarios, the lender and developer take on a lot of risk (it’s not like a condo, where pre-sales mitigate much of the risk). Every member of the panel agreed that a good sensitivity analysis is crucial. It’s important to understand what will happen to all stakeholders if interest rates and cap rates fluctuate.

Most developers are looking to borrow as much as they can. Construction loans are based on costs and the value of the building. So there is a strong sensitivity to the variables. Right now, when there is uncertainty about future rates, lenders are becoming more cautious about the parameters that make up valuations. Most are anticipating change and are preparing accordingly.

Disagreed: not everyone should build

The moderator was very passionate about the opportunities in Canada and was encouraging everyone to build, similar to what’s been done in the U.S. I have long disagreed with this view.

Not everyone qualifies for new apartment construction. In Toronto, I’m seeing a lot of people who think that they can retrofit failed condo sites for an apartment project. It’s a misguided approach. Here’s why:

  • Density: Land prices are driven by density. Construction costs are pretty constant whether you’re building an apartment or a condo. However, apartments have more restrictions on size in relation to value, yet the land price is still high. It can turn out to be a losing proposition.
  • The Starting Point: condo developers will pay for the land first, and work backwards to see how much revenue they can get. Successful apartment builders start with the market first and determine what it can sustain in terms of rent. They evaluate land purchase price based on market feasibility. Hard to do when you’re trying to retrofit an apartment construction to an existing condo site. 

Condo developers have had a lucrative decade. It’s been fairly easy for them to get financing, and they’ve been able to dictate terms to a certain extent. Investor syndicates is one trend that’s arisen from this climate. Different investors get together and show up as the guarantor on the loans. 

It’s a great model for condos, but it doesn’t translate to apartment construction loans. So for people trying to retrofit, it’s essential that they find more than just investors. They need experienced developers that have built and ran rental buildings.

Disagreed: student housing cap rates and valuations

There was one panelist who boasted about his student housing property in a great location, which was generating great rental income. We talked at length about aggregations on a per unit basis. This owner didn’t care about per unit value. He was only focused on total revenue.

I take issue with that. Any real estate trades on cap rates (net operating income divided by purchase price = rate of return pre-debt). Cap rates have come down significantly across all asset classes because debt is readily available and cheap. In student housing in particular, cap rates have come down significantly, but the cost of debt for student rentals hasn’t come down in the same way that it has for apartment buildings.

The panelist/owner justified his position by saying that his “big rents” offset the low cap rates. However, I still feel that valuations for student housing are too aggressive. They need to come down because the financing environment isn’t as favourable, with respect to LTV and interest rates, as it is for apartment buildings. 

Balance returns with realities

There is no disputing that new apartment construction will deliver favourable returns during the next decade. But I can’t stress enough how important it is to balance potential returns with the realities of building an apartment from the ground up.

Understanding your strengths as well as your limitations is critical to maximizing the power of the right project. The right partners – developers, lenders, suppliers – can give you a greater or optimal level of expertise that you may not be able to cultivate on your own. 

by First National Financial LP 12. May 2015 12:57

Market Commentary - March 27, 2015


As I write this on Thursday afternoon, bonds have just completed a full  reversal of the rally last week.  5 and 10 year bonds have sold off and are now yielding 0.86% and 1.43%, just as they did two weeks ago.  This is evidence of a lesser known physics/finance crossover: what goes up, must come down.  

Anyway, you’re probably wondering why yields are 13-15bps higher since the weekend.    Much of the move happened on Thursday in response to comments made by Bank of Canada Governor Poloz at a press conference in London.  The Governor reiterated that the positive offsets from lower oil prices will take longer to emerge and that the global recovery remains fragile, so further rate cuts can’t be entirely ruled out.  However, it sounds like the bank will be more cautious in its use of the overnight rate to deliver additional stimulus going forward.   With US/CAD currently sitting around 1.25 and yields still well below levels seen prior to the surprise cut in January, the bank has room for some patience.  The net effect seems to have reduced the probability of another rate cut in April and/or June, and bonds have sold off as a result.  

In other news, oil climbed to its highest price in more than two weeks as Saudi Arabia and its allies started bombing Shiite rebels in Yemen. 

No scheduled Canadian economic data on Friday, but US Q4 GDP numbers are out at 8:30am and the Fed’s Yellen shares some wisdom at 3:45pm.  

Lastly, in sure sign of the apocalypse, the Leafs did not sell out earlier this week, setting the lowest recorded attendance since moving to the ACC 16 years ago.  

Have a good weekend,

Treasury Guy. 


Jason Ellis | Managing Director, Capital Markets 

by BlogAdm!n 27. March 2015 09:20

Market Commentary

Good Morning,

As of Thursday evening, interest rates were generally 13-15bps lower than at the end of last week with the majority of the rally coming on Wednesday following the US Federal Reserve policy statement. A day by day synopsis is below for your reading pleasure.

  • Monday: Bonds opened stronger and yields fell about 3bps as WTI (oil that is, black gold, Texas tea) made fresh multi-year lows.
  • Tuesday: Without any material news items, the market was in full spring break mode with choppy range bound trading. Yields ended about 1bp lower.
  • Wednesday: The day opened stronger on further declines in oil prices, but the real story was the Fed statement in the afternoon. The market expected the word 'patient' (as it relates to FED timing to move rates up) to be replaced by data dependent policy language and for reassurance of higher inflation in the coming months while still leaving a June rate hike on the table. It turns out that is pretty much exactly what happened, but the market decided the message was more dovish than expected and bonds rallied a further 9bps.
  • Thursday: US initial jobless claims were about the only thing keeping the market awake. Claims were broadly unchanged and inspired much apathy among traders. Yields end the day unchanged
  • Friday: I'll be skiing by the time you read this, but I can tell you that there is no economic data due out of the US, but Canadian CPI data came out this morning and may lead to buying or selling, but not in much volume as the market is truly quiet due to March break.

Lastly, I would be remiss if I didn't mention that today is the Vernal Equinox (that's "Spring" if you use small words, or "Ostara" if you count yourself among the Pagans). It may not feel like it yet, but winter has ended, and summer will come again.

Have a good weekend,

Treasury Guy

Jason Ellis
Managing Director, Capital Markets 

by First National Financial LP 20. March 2015 09:54

Financing Done Right - Case Study

Client Objective: blaze new trails in student housing

An accomplished business professional established a partnership with the owner of a flourishing plumbing company. The short-term goal was to complete a small student housing project, but the long-term goal was to blaze new trails in student housing.

First National Solution: provide the first seed loan and support the client in realizing his vision and potential

Recognizing the potential of the client's vision, the First National team convinced the internal credit team to fund the first $2 million loan despite the risks associated with a new, unproven partnership and the student-housing sector. Several subsequent deals followed. With First National's support and guidance, the client progressed his vision to a student-focused condo project, a game changing concept in student housing.

First National Approach: connecting with the client's vision

Understanding what the client was trying to achieve, the First National team was able to apply ingenuity to develop turnkey solutions that supported the client's growth and momentum. The relationship was and remains to be predicated on facilitating the client's growth, vision, innovation and entrepreneurialism. 

Check out the latest news, insights, and opportunities from First National Financial LP. https://www.linkedin.com/company/first-national-financial-lp

by BlogAdm!n 17. March 2015 10:20

Market Commentary - March 13, 2015

Good Morning, We're back. Apologies in advance for the briefness of this note, but the 5-year CMB issue is literally minutes away from pricing and things will get really busy around here. Once in a while I still do real treasury stuff like yelling "BUY" and "SELL" into phones like Charlie Sheen in Wall Street.

Anyway, other than the CMB issue, the other big news this morning was the Canadian Employment data. Overall, employment fell by 1,000 jobs (slightly better than consensus of down 5,000 and certainly better than a 'whisper' number as bad as 20,000). The details of the report as it relates to full time/part time and Public/Private jobs were mixed. The unemployment rate moved two ticks higher to 6.8%. Not surprisingly, Alberta was a weak spot shedding 14,000 jobs. Bottom line is that job figures were weak, but not as bad as feared. The bond market is relatively unchanged since the numbers were released.

Speaking of bonds, they had a pretty strong week. Yields have fallen about 8-9 basis points after rising more than 20 basis points last week.

Have a good weekend,
Treasury Guy

Jason Ellis
Managing Director, Capital Markets

by First National Financial LP 13. March 2015 12:59