Market Commentary

Residential Market Commentary - September 10, 2015

As we head into the busy, autumn, real estate season Canada's housing market is showing itself to be largely balanced and stable.

Of course Vancouver and Toronto continue to exert undue influence on the national averages. In Toronto the average price of a detached, single-family home topped one million dollars again.

In Vancouver, August sales surpassed year-ago numbers by more than 21% with 3,362 deals done. The MLS benchmark price is up 12% from 2014. The average for a detached property is now $1.16 million, up 17.5%.

The other market showing big swings is Calgary. August sales were off 27% compared to 2014, but prices remain relatively robust. The average and the benchmark are down 0.09% and 2% respectively year-over-year. But on a year-to-date basis the benchmark is actually up 2.4%.

Montreal remains the most active market in Quebec with 2,408 residential sales in August, up 8% from a year ago. The median price for a single-family home rose 2% to $290,000.

Low interest rates will likely continue to prop up home sales. All of the current economic indicators suggest the Bank of Canada will remain on the sidelines when it announces its latest rate setting on Wednesday.

by First National Financial LP 10. September 2015 11:24

Market Commentary - September 4, 2015


Bonds were volatile, but largely range bound this week.   As of Thursday afternoon, 5 and 10 year GoC bond yields were only 1-2 bps higher than 1 week ago (0.75% and 1.46%), but they really bounced around along the way. 

The week started with oil stretching its remarkable rally another $3 taking WTI (West Texas Intermediate aka ‘Texas tea’) to $48 from $38 just one week earlier.  This was bearish for bonds and yields moved sharply higher Monday.  (Bearish because inflationary things make yields likely to rise, which in turn makes bond prices fall…but you know that by now)

Statistics Canada reported on Tuesday that GDP declined for the second consecutive quarter.  Technically, that’s referred to as a recession, but I guess it depends if you’re named Harper or Trudeau.  The good news is that the contraction is not broad based and employment is up by 102,000 jobs YTD.   Hope springs eternal.  The odds of a rate cut next week now stand at about 15% (down from 30% a week ago).

Today’s employment data has the potential to drive some price action but positions should be small heading into payrolls and the BoC meeting next week.  (I can’t comment on the outcome here as it’s still Thursday as I write this).

Perhaps more relevant than the actual level of interest rates these days is the continued move wider in credit spreads.  Given the volatility in the markets, investors have become increasingly weary of credit products and spreads have been suffering as a result.  One of the most liquid and transparent windows to the credit market in Canada is the spread at which our big Schedule 1 banks issue 5-year deposit notes.  Deposit note spreads have moved from +85 in December to +125 today.  NHA MBS spreads have kept pace, and assuming you could even sell a new issue, it would probably trade around +100 compared to +55 in December.   Even AAA rated 5year CMB’s maturing in June 2020 have widened from +35 when they were first issued in March to +50 today.  Apparently an IOU from the Queen herself isn’t good enough.  What’s the take away here?  It’s tough out there and corporate treasuries across all industries are feeling the heat.  Feel free to throw a couple extra bps on that next mortgage for me…Treasury Guy needs a new pair of shoes.

On a brighter note, the Blue Jays are on fire and it’s a long weekend, so get out there and forget about credit spreads for a while…I know I will.  Blurg.


Treasury Guy OUT.

Jason Ellis
Managing Director, Capital Markets

by First National Financial LP 4. September 2015 09:15

Residential Market Commentary - August 31, 2015

The Canadian economy is all but certain to register a technical recession in the 2nd quarter. Last week global stock markets took a violent tumble and made a sharp rebound that rattled many investors. Yet Canada's housing market continues to ignore the world around it and defy gravity.

Two recent surveys are not predicting any slowdown until next year. Both cite interest rate activity as the key trigger for any change.

A poll by Reuters projects home prices will increase by an average of 5.2% across the country this year. That's up sharply from the 3.4% boost projected back in June.

The Reuters economists do see a slowdown coming in 2016 and 2017, but they have upgraded their forecasts for both of those years. The expectation is that interest rate hikes, led by the U.S. Fed, will decrease housing affordability while also making other goods and services more expensive.

A survey by one of Canada's big banks also points to interest rates as the key factor in any housing slowdown. It forecasts the Bank of Canada will increase its key rate by 75 basis points in the second half of 2016.

The bank sees that slowing price growth on a national basis, with some local market segments, like condos in Montreal, actually experiencing price declines.

by First National Financial LP 31. August 2015 11:31

Market Commentary - August 28, 2015

Greetings Capital Market enthusiasts,

I’m writing to you on Thursday evening as I will be out of the office tomorrow and have already failed to post anything the last two Fridays.  The marketing people were getting restless, so here we go…

Admittedly, much has transpired since my last posting, so in the immortal words of Inigo Montoya of The Princess Bride…”Let me ‘splain…no, there is too much…let me sum up”.

When I last wrote on August 7th, 5 year bond yields (GoC 0.75% Sep 2020) were around 0.80% and the S&P TSX was at 14,300.  Yields and equities fell quite steadily until Monday this week when both took a swan dive inspired by an 8.5% drop in China’s benchmark stock index.  That sparked selloffs in Europe and then North America.  5yr yields fell as low as 0.55% and the TSX as low as 12,700 before the ‘dead-cat bounce’ back to 0.74% and 13,700.  (Note: if things fall from high enough...yields, equities or even a dead cat, they will bounce).  So what happened between then and now?

In broad strokes, US inflation was showing signs of slowing, which complicates the Fed’s decision about raising short term rates at their September meeting.  Low inflation is…anyone?... ”dovish”.  A dovish central bank will help bond prices rally which makes bond yields…anyone?…”lower”.   The probability of a 25bp hike in the Fed fund rate at the September meeting has fallen from 50% two weeks ago to about 30% today (the same probability for a September rate cut in Canada).  In China, the central bank devalued the yuan in an effort to boost exporters to help combat the deepest economic slowdown since 1990.  Again…slow economic growth in big economies will help keep bond yields low.  Oh…and I guess I should mention oil.  A barrel of heavy crude from Alberta now costs less than a case of beer.  Its lowest level in 9 years.

In terms of data releases, US retail sales last week showed a bit of life, but no more than consensus expectations and market reaction was muted.  German and Italian economies expanded less than forecast and France’s stagnated, highlighting the fragile nature of the euro zone’s recovery.

Greece is still clinging to life and reached an accord with creditors on August 11th that will unlock another $94 billion in funds.  The news was positive for Greek bonds and 2yr yields have fallen from 63% to 15%.  That kind of rally can buy a lot of Gyros.

In housing news, CMHC released its quarterly House Price Analysis and Assessment last week.  The report cited high risk of overvaluation in Toronto, Winnipeg, and international hot spot Regina, but relatively low risk in Vancouver.  Weird.

Finally, many of my colleagues like to ask me where rates are going.  You may be wondering too.  I’ll give you the same answer I give them: “There are known knowns; things we know we know.  We also know there are known unknowns; things we do not know.  But there are also unknown unknowns, the things we don’t know we don’t know”.   I think my knowledge of interest rate trajectories falls somewhere in the last two thirds of the statement, so don’t ask me.

What I do know, is that I’m out of here.  Have a great weekend.

Treasury Guy

Jason Ellis
Managing Director, Capital Markets

by First National Financial LP 28. August 2015 09:35

Financing capital improvements: Be practical about your needs and proactive in your efforts


Darryl Bellwood, Assistant VP, Commercial Financing at First National Financial LP 

Most owners of apartment buildings have either had to or are currently contemplating capital improvements to upgrade building quality. While many owners consider building improvements, there is often uncertainty about how to finance those upgrades. 

Darryl Bellwood, Assistant VP has worked with many different types of owners to help them figure out the best financing options for their impending capital improvements. While many financing alternatives are available, owners need to understand and consider the severity of the issue. 

“There are two main categories of severity,” says Bellwood. “Safety is one category. For example, unsafe balconies demand urgent attention. Integrity of the property is the second category. If there are holes in the roof or the underground parking structure is deteriorating, it’s important to address those issues as well.” 


Financing approach: what makes the most sense

When Bellwood sits down with clients, the financing approach is usually the first topic of conversation. They discuss whether financing out of pocket or drawing equity out of the property makes the most sense. 

Owners that choose to finance out of pocket must be able to access the money from their own source of funds. Drawing equity out of the property can mean taking out a second mortgage on the unused portion of the equity in the property. 

“Most property owners are aware of their responsibilities to undertake capital improvements. If they have properties in a high-demand location, it’s basically a necessity to maintain the building’s level of income,” says Bellwood. 


Assessing borrowers for financing: the lender’s perspective

Bellwood has helped many owners obtain financing for capital improvements. In some cases, mortgages were maturing, and the owner was able to refinance the property and draw equity out. Others chose second mortgages to complete upgrades on balconies, parking garages or roofs. 

As a lender, Bellwood structures financing based on the diligence of the owner. “When I’m refinancing, I place a lot of weight on whether the borrower has been proactive or not. Track record certainly impacts my decision making.” 

Owners that take initiative to contact engineers, arrange assessments, get quotes and even start with preliminary work are more likely to receive their funds up front. However, owners with urgent needs that haven’t taken advance action can usually expect a hold back on the funds. 

“If the owner is proactive and diligent, I feel more confident about their desire and commitment to complete the capital improvements on time and on budget,” says Bellwood. “However, there are occasions with certain owners where I hold back funds until they complete the work.” 


Be practical and be proactive

If you’re looking to secure financing for capital improvements, it is important to evaluate your needs honestly and determine whether your focus is safety or integrity. It is also critical to take initiative and demonstrate a strong commitment to executing and completing the capital improvements in a timely, efficient manner. 

“Track record makes a difference when it comes to financing capital improvements and assessing the associated risk. Ultimately, my goal is to work with owners to support them in maximizing the value of their assets. Owners that are investing significant effort toward that same goal make my financing decisions a lot simpler,” says Bellwood.   


Connect with Darryl on LinkedIn or via email to discuss your commercial property project.

Sign up for Commercial Market update email. Learn more

by First National Financial LP 25. August 2015 09:07

Financing done right - Case study

Client Objective: get CMHC financing for air space parcel

Mixed-use development is a strategic approach to sustainability and a growing trend in Vancouver. A client with mixed-use development wanted to retain the air space parcel designated for rental and secure CMHC-insured financing.

The First National Solution: legal validation of air space parcels

Initially, CMHC turned the deal down. Air space parcels were uncharted territory, and CMHC wasn’t convinced of the viability of the deal. The First National team decided to explore land titles to determine the legal definition of an air space parcel. The team then engaged a third party expert to validate the concept. With the third party validation, supported by examples of other developers leveraging air space parcels, CMHC approved the deal. In the end, First National provided to the client with $10 million in CMHC insured financing.

The First National Approach: the right kind of persistence

The First National team refused to back down after the initial no from CMHC. Instead of aggressive persistence, the team chose to dig deep and be resourceful so it could arm its CMHC contacts with the right information to present a logical argument to the board. By persisting in the right way, First National and CMHC got the opportunity to set a precedent for a growing development and financing trend.

by First National Financial LP 19. August 2015 09:43

Market Commentary - August 7, 2015

Canada came into work on Tuesday to lower yields.   Weak Chinese PMI and soft commodity prices had fixed income trading with a bid tone (prices up, yields down…but you know that by now, right?).  The Greek stock exchange also reopened for trading after 5 weeks and suffered a 23% drop within minutes.  The good news (for the rest of us) is that other stock markets were unaffected by the sell-off, confirming that other economies have long since severed ties with Greece, limiting any exposure to loses in that market.

Yields moved back higher Wednesday morning following comments by Federal Reserve Bank of Atlanta President Dennis Lockhart suggesting that September could be the right time to lift rates. (That’s “hawkish” if you’re keeping score).  The prospect of US rates moving up combined with uncertainty ahead of our October 19 election will keep the C$ on its heels.  New 11 year low set on Tuesday of $1.32 for USD/CAD.

With the most recent FOMC statement underscoring steady gains in labour markets and clear data dependency for ‘rate lift-off’, this week was really going to be all about today’s Non-Farm payroll numbers.   As it turned out, payrolls came in little lower than expected, but with a prior month revision up.  Hourly earnings were also up, if only modestly.  All told, a solid report that keeps the Fed on track to raise rates as early as the next meeting.  Canada also released employment data today.  Similarly, largely as expected although some of the details were less impressive.  Bottom line is that the employment trend in Canada doesn’t read like a recession.  In the end, the market which had been coiled up for a volatile swing based on today’s reports is largely unchanged following the numbers. 

The odds of a rate hike by the FED in September remains around 50%.  On the flip side, odds of a rate cut by the BoC in September are around 20%.  (Probabilities based on Fed Fund and OIS futures respectively).

Speaking of futures, the generic front contract for West Texas Intermediate (aka: OIL) fell below $45 this week...its lowest level since March. 

So where does all this leave rates?  5’s are 0.80% and 10’s are 1.45%...both 1-2bps higher than last Friday.

More importantly, I’ve got both feet in the Blue Jay bandwagon now.  Yankees are coming to town this weekend and I will definitely be paying attention.  This is getting interesting.  Also this weekend…the annual taste of the Danforth festival is on in Toronto.  If you’re in the neighbourhood, stop by and eat some olives…

As for me…I’m off to pick up my new Ducati tomorrow…the only problem is that I haven’t told Mrs. Treasury Guy yet.  I may or may not survive the weekend.  I‘ll let you know how it goes next time.


Have a great weekend,

Jason Ellis
Managing Director, Capital Markets

by First National Financial LP 7. August 2015 12:01

Market Commentary - July 31, 2015

Greetings.  The long weekend is upon us and today’s comments will be suitably brief.  It’s an early close for the bond market and as the resident Treasury Guy, it’s an early close for me too.

It was a relatively quiet week with respect to Canadian bond yields.  The new 5yr benchmark (0.75% Sep 2020) ended last week at 0.79% and is at 0.82% just ahead of the May GDP data this morning.  The 10yr benchmark (2.25% Jun 2025) is effectively unchanged week over week at 1.48%.  CMB spreads are also unchanged.  Not a lot of drama, which has been a nice change. 

[Last minute update: Forget that thing about no drama.  May GDP numbers were released at 8:30 and they aren’t pretty.  GDP fell 0.2% in May.  Yields are 6-7bps lower in the immediate aftermath (bond prices higher).  If we add this to oil back below $50, the September 9th Bank of Canada meeting start to get more interesting….]

In completely unrelated news, as my more faithful readers will know, this commentary is THE place for breaking news on Kraft Dinner.  Apparently, the now ‘less orange’ Kraft Dinner is being officially rebranded as ‘KD’.  Genius.

Lastly, depending on where you are, have a great Simcoe Day,Emancipation Day, Heritage Day, or if you’re in BC, the less than imaginative, British Columbia Day.  Be safe out there.

Treasury Guy

Jason Ellis
Managing Director, Capital Markets

by First National Financial LP 31. July 2015 10:54

Market Commentary - July 24 2015

It’s been a relatively quiet week compared to last week’s BoC meeting cliff-hanger. 

Credit spreads are generally wider and GoC yields drifted lower all week.  As of this morning, 5 and 10yr bonds are trading 7 and 9 bps (respectively) lower than last Friday morning.  In fact, 5 year yields set new lows for 2015 this week.  Why are rates lower you ask?  According to TradeWeb, technical Candlestick analysis reveals that buying has formed a bullish Real Body on daily charts, including a good sized Lower Shadow and a Shaven Top.  All of these components suggest that additional gains are likely.  Bulls will be looking for a close above the base of the bearish Engulfing pattern that formed at the peak this month.  Seriously…I can’t make that stuff up.  If you ask me, I think there are more buyers than sellers.

Wednesday brought a $3.3billion 5-yr Canada auction with the 0.75% September 2020 becoming the new benchmark on Thursday (replacing the 1.50% March 2020), so don’t be fooled or surprised when looking at ‘benchmark’ 5yr yield or swap spread history.  All else being equal, they will have changed by 15bps.  It’s just the new reference bond.  

Also on Wednesday, First National came to market with a $358 million 5yr NHA MBS issue…our first syndicated issue since February.  It isn’t an easy market right now, but the deal was well subscribed and distributed.  Overall, a good result in the context of the prevailing market.  Spread on the deal was 9bps wider than a pool from another issuer last month, indicative of wider credit spreads generally and significant new issue concessions required to get a deal done.  Nonetheless, it’s good to know the liquidity is out there, even if it takes a little grease.

Looking ahead to next week, markets will be focused on the FOMC meeting on Wednesday (unless you’re one  of the 37 million AshleyMadison.com users whose name and ‘preferences’ have been hacked, in which case, I expect your attention might be elsewhere….).  Anyhow, virtually no chance of a rate hike from the Fed next week, but the market will be looking for clues about a possible hike in September.  In Canada, the next BoC meeting is scheduled for September 9th, and OIS futures suggest a 15% chance of another 25bp.  With WTI (oil that is, black gold, Texas tea) back below $50, I’d suggest those odds might be higher by next week.

Finally, the Pan Am games wrap up this weekend, but you can still catch the Women’s bowling final on Saturday…good tickets still available.  Have a great weekend.

Treasury Guy

Jason Ellis
Managing Director, Capital Markets

by First National Financial LP 24. July 2015 09:30

Market Commentary - July 17 2015

Good Morning.

This week was mostly about the BoC rate announcement and MPR (Monetary Policy Report) on Wednesday.  To be honest, it was a welcome distraction from the Greek story…I can only make so many Spanakopita jokes.

Before we get to the BoC meeting, it’s worth mentioning the disappointing US Retails sales figures on Tuesday.  Consumer spending fell unexpectedly with downward revisions to the prior two months.  The news was positive for bonds (prices up, yields down) and combined with poor liquidity generally; helped push yields 3-4bps higher on the day.

Wednesday brought one of the more exciting BoC announcements in recent memory.  It was basically a coin toss with BAX and OIS contracts suggesting a 50/50 chance of a cut.  As you already know, Governor Poloz cut the overnight rate by 25bps to 0.50%.  The bank indicated that “the lower outlook for Canadian growth has increased the downside risks to inflation”.  The market reaction to the cut was reasonably muted, but a cut now or cut later was pretty much priced in, so there wasn’t a lot to get too excited about.  Bonds rallied (yields fell) about 5bps on the day.  At the same time, Fed Chair Yellen was busy re-iterating that rate hike in the US this year was still in play.

In related news, the Prime rate will only be falling 15bps (from 2.85% to 2.70%).  This marks the third time in recent history that the Prime rate has not matched the change in the BoC benchmark rate.  In December 2008, banks moved Prime by only 50bps in response to a 75bp BoC cut and more recently, banks only cut 15bps in January of this year following the surprise 25bp cut by the BoC.  The basis between the BoC overnight rate and Prime is now 45bps wider than it was prior to 2008.  I know many of you will call this a money grab by the banks, but the truth is, regulatory capital and liquidity rules, combined wider credit spreads and reduced liquidity generally have structurally changed things since the liquidity crisis.  I don’t like paying bank fees any more than you do, but try to keep these things in perspective…it’s not a conspiracy. 

The next BoC meeting date is September 9th, and the implied probability of another 25bp cut stands at 17%. 

Meanwhile, back in paradise, the Greek parliament approved the first set of austerity measures needed to continue negotiations with its creditors.   So that’s good.  Odds of the “Grexit” are now down to 10% after being as high as 40% a week ago.   

All told, 5yr rates this morning are about 11bps lower than 1 week ago and 22bps lower than 1 month ago.  10yr rates are 13bps lower than 1 week ago and 16bps lower than 1 month ago.  (Note the continued steepening of the yield curve between 5’s and 10’s).

In securitization news, RBC released a mid-year review this week.  Here are some highlights:

·         The balance of outstanding CMBS has stabilized at $8 billion after eight years of decline from $20 billion in 2007.  Issuance this year has totaled $660 million in two deals so far. RBC expects that balance to grow before the end of the year.  I hope they’re right.  I expect you do too.  Send us your deals...our lines are open and our commercial mortgage underwriters are standing by!

·         As at May 2015, the current delinquency rate of all outstanding Canadian CMBS issuance was 0.4% compared with 6.5% for the US CMBS Market.  Go Canada Go.

·         Asset Backed Commercial Paper balances remain stable at $29 billion (relative to a peak level of $106 billion prior to the 2007 liquidity crisis).  I expect this balance to start falling next year when new rules from this year’s budget are implemented making insured mortgages ineligible collateral for ABCP conduits.   Insured mortgages currently account for as much as 25%-30% of ABCP balances, but will be amortized out of programs over the next 5 years.

OK. That’s all I’ve got for now, but before I go I have an important safety announcement.  Be advised that “Roulette” flavoured Doritos (which contain random ‘ultra spicy’ chips) have been declared “DANGEROUS” by a school in the UK which has sent a note home to parents suggesting the snack could cause “severe distress”.  So be warned…stick with Cool Ranch or face the consequences!

Right, that’s really all now.  Back to the British Open and some Treasury stuff.



Treasury Guy

Jason Ellis
Managing Director, Capital Markets

by First National Financial LP 17. July 2015 10:30