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Market Commentary

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

December 19, 2014

Global stock markets surged on Thursday with the S&P500 headed for its best two-day rally in nearly two years as the Federal Reserve pledged patience on boosting rates. As usual, a 'dovish' Fed is making up for a lot of bad news from Europe and other parts of the world. Of course, beyond the next 'couple' of meetings, Fed Chair Yellen made it clear that the potential for a hike in rates was in place. In response, bond prices out the curve, in contrary to equities, fell sharply on heightened expectations that borrowing costs will rise next year. But that's next year, so don't worry, be happy….Canadian bond markets reacted to the FOMC news in a derivative kind of way and lagged the move in Treasuries. 5yr GoC's are 10bps higher than the close on Tuesday, but 5yr Treasuries are up 16bps. (Plus your RRSP account will look much better today than it did on Tuesday).

Of course, as low as rates are in Canada, borrowers can be envious of their Swiss peers. The Swiss National Bank surprised markets on Thursday by introducing negative interest rates. Deposit your hard earned savings for a year, and get back $99.25 for every $100 invested. On the plus side, you get a giant novelty Toblerone bar when you withdraw your money, so that's nice. Of course, the negative rates are in place to discourage safe haven buying of short term deposits by anxious investors in Russia. Sadly, calls to SNB to borrow money at negative rates have not been returned.

And lastly, in the category of 'that just isn't right', a Liter of carbonated water (a.k.a Perrier) now costs ELEVEN times more than a Liter of West Texas Intermediate.

Merry Christmas, Happy Hanukah, and best wishes for a healthy, happy and prosperous new year. I'm off to practice my Feats of Strength for Festivus now. Treasury out!


by First National Financial LP 19. December 2014 13:51

December 12, 2014

Let's just not talk about over valued real estate, oil prices, or the equity market in general, and try to find some silver linings shall we?

It was a busy week for mortgage securitization, and that's never a bad thing. The CMBS transaction issued by First National and CMLS closed this week and a new CMBS transaction from MCAP priced right on its heels. Including the RBC 'Real-T' transaction at the end of October, that's over $750 million of Canadian CMBS supply in about 6-weeks. Not too shabby.

Also this week, First National and Home Trust each came with syndicated NHA-MBS Transactions totaling $500 million and have traded well. Lastly, any moment now, the 5-year CMB will be pricing. It is a $5 billion re-opening of the December 2019 maturity and is sold out. The next 5-year CMB will be issued in March 2015 and will carry a June 2020 maturity date (that's 63 months if you're keeping score).

As far as rates go, I can't believe I'm typing this, but we have set new 1-year lows in 5-year Gov't of Canada bonds this morning which are currently trading at 1.34% compared to 1.48% last Friday. The same is true of 10-year bonds. The June 2025 Canada bond is now at 1.90% compared to 2.07% last Friday. My advice? Borrow early and Borrow often!


by First National Financial LP 12. December 2014 13:53

December 5, 2014

Interest rates are generally 9-11bps higher than this time last week, and are sharply higher in early trading this morning following a stronger than expected employment data in the US.  The 321,000 gain in non-farm payrolls may have woken markets up to the fact that the Fed could hike rates as early as next Spring.  The Canadian employment data wasn’t as encouraging though.  Monthly employment here declined by 11,000 jobs, although full time employment was up while part-time employment was down.  All in all, despite the modest drop for November, the labour market in Canada appears to be on better footing heading into the end of the year.

On Wednesday afternoon First National along with CMLS launched a $282 million CMBS transaction with investors in Canada and the US buying the new issue.  Another Canadian CMBS transaction (from a different issuer) is currently being marketed, and we should see it price next week.   While we’re on the topic of securitization, Canada Housing Trust will be also be in the market next week with a re-opening of the December 2019 CMB.  The next 5year CMB will be scheduled for March 2015 and will likely carry a June 2020 maturity date.

CMHC this week announced significant changes to its fee schedule as it relates to NHA MBS and CMB securitization.  Under the NHA MBS program, CMHC guarantees timely payment of principal and interest.  CMHC is increasing the MBS guarantee fees across all terms effective April 1,2015 (April fools day…not).   The increases will add as much 6-7 basis points to the cost of funding mortgages in CMHC sponsored securitization programs.   Until then…securitize early, and securitize often.


by First National Financial LP 5. December 2014 13:54

October 10, 2014

Just when you thought it was safe to get back into the pool….

Wednesday’s post-Fed minutes equity rally reversed sharply on Thursday as investors focused again on the outlook for the global economy.  ECB (European Central Bank) chief Mario Draghi added fuel to this week’s fire with a warning about the troubled euro zone.  Toss in Ebola, ISIS, and Hong Kong protests and there is a lot for markets to think about.  Hopefully, with the long weekend in Canada and the US (Columbus Day), markets will have plenty of time figure it all out before Tuesday.

The good news for mortgage borrowers is that bond rates are back down to recent lows thanks to the general dovish tone of the FED.   Unfortunately, credit spreads are under pressure given the recent blood bath in equities, but Canada Mortgage Bonds did outperform the rest of the credit spectrum, so we’ve got that going for us.

Fun Thanksgiving fact: Benjamin Franklin preferred the Turkey over the Bald Eagle (“a bird of bad moral character”) as the American national bird. 


by First National Financial LP 10. October 2014 09:56

June 13, 2014

CMHC announced the launch of the June 5 year CMB issue on Thursday for pricing on Friday June 13th.  As expected, the issue will be a re-opening of the June 2019 maturity date.  The issue size is $5 billion, consistent with the last several 5 year deals.  Indicative Seller allocations are approximately $225 million, down from $280 million last quarter reflecting greater participation by smaller lenders, likely driven by seasonally higher origination volumes.  Expected pricing is in the context of the market at GoC March 19’s +32bps.  That spread is virtually unchanged from when the issue originally launched in March at +31.5bps.  Dealers are reporting that books are full and that the deal should be well received.   The next 5yr CMB issue is expected in September, and will likely see the launch of a new December 2019 maturity date with an initial term of 63 months.   Based on the prevailing yield and credit curves, the new December maturity date should trade about 12bps higher than the outgoing June bond.


by First National Financial LP 13. June 2014 10:40

May 7, 2014

Today marks the start of three looks at the Canada's housing industry.  The report of note shows the value of building permits issued by municipalities dropped 3.0% in March, missing expectations for a 4.3% increase.

While permits for residential construction rose that was more than offset by a decline in non-residential permits.

Residential permits gained 1.0% with a 7.9% increase for multi-family units.  Both numbers are turnarounds from significant declines in February.  Permits for single-family dwellings dropped 3.6% in March, the fourth decline in five months.

Reports on housing starts and new home prices come out tomorrow.

North American markets were mixed in early trading.

Bond yields are flat to +1 bps.


by First National Financial LP 7. May 2014 10:42

May 6, 2014

A couple of looks at the broader economy in North America today:

Canada's international trade managed to eke out a surplus in March.  It stands at $8 million, on a significant decline in exports.  Notably, exports to the U.S. dropped 2.5%.  However, February's numbers were revised upward to show a major $850 million increase rather than the previously reported $290 million.

The U.S. saw its international trade deficit narrow 3.6% in March as exports rose and imports declined.  Canada and South Korea were America's biggest customers.  Despite the shipments into this country the U.S. trade deficit with Canada rose 3.7%.

North American markets were all lower in early trading.

Bond yields are up 2 - 3 bps.


by First National Financial LP 6. May 2014 10:44

April 30, 2014

A busy day for data with the major reports being GDP in Canada and the U.S.

Canadian GDP clocked in with modest 0.2% increase in February over January.  Oil and gas and mining led the gains.  Year-over-year Canadian GDP is up 2.6% for February, the same as January and just a little better than expectations.

Growth in the U.S. economy bearly registered in the first quarter, increasing just 0.1%.  That's well short of expectations and well off the 2.6% growth registered in Q4 of 2013.  Both business investment and residential home construction fell.  Projections call for a better Q2 as hiring and consumer and business spending increase.

Payroll processor ADP says private employers in the U.S. added 220,000 jobs in April, beating expectations.  March figures were revised upwards.

The U.S. Fed's FOMC wraps up its monthly meeting today.  Bank of Canada Governor Stephen Poloz continues his parliamentary testimony.

North American markets were all lower in early trading.

Bond yields are down 1 - 3 bps.


by First National Financial LP 30. April 2014 11:57