Greetings mortgage market participants,
The longest day of the year is behind us. The pagan holiday known as the summer solstice was yesterday, and what a beautiful day it was in Toronto. Now, as the days get shorter, we begin the long slow decent into winter. Glass half empty? You bet, but it’s a fact Jack. The good news? Nigeria plays Iceland today. So we’ve got that to look forward to.
Canada Mortgage Bond (“CMB”)
Canada Housing Trust (“CHT”) issued its quarterly 5 year CMB on Wednesday. The deal was a $5.5 billion re-opening of the June 2023 bond first issued in March. The re-opening was priced at GoC +30.5, compared to GoC +32.5 in March.
The next 5 year will be issued in September and will have a December 2023 maturity date. Remember, CHT issues its 5 year bonds twice in order to build up a larger pool of outstanding bonds in an effort to enhance liquidity in secondary market trading. The initial launch has a 63 month term with a 60 month term at the re-opening.
Since we’re on the subject, the 10 year CMB is typically opened three times, first as a 124 month issue, then 121 months, and finally 118 months. The 10 year issues tend to be smaller, so it takes three transactions to build up to benchmark size. Why the odd terms? The 10 year CMB is issued in February, May, August, and November but carries maturities of March, June, September and December. Last month was the third and final opening of the March 2028 bond. The next 10 year CMB will come in August with a December 2028 maturity date. Savvy?
Wow…that section really took on a life of its own. I think I blacked out. You probably did too. Sorry.
Covered Bonds
The TD bank issued $1.25 billion in covered bonds on Thursday including a new $750 million 5 year floating rate note (“FRN”) priced at 3-month CDOR +31. Covered bonds are rated AAA by virtue of the pool of mortgages that collateralize the deal, but the bond payments remain the obligation of the bank and technically rank pari-passu with all other unsecured and unsubordinated obligations of the issuer (like deposit notes). In the event of default by the issuer, however, the mortgage pool will be used to cover the claims of bond holders. For spread context, a normal course unsecured bank deposit note would be rated AA and trade around CDOR+43 and the AAA rated CMB FRN trades around CDOR -6.
RBC also issued covered bonds on Thursday, but in Europe. The Euro 1.5 billion issue was well received and final pricing tightened to Mid Swap (“MS”) +2 from initial guidance of MS +6. MS is the index which is used like CDOR as a benchmark for floating rate issues in Europe. For context, the deal swaps back to 3-month CDOR+26 in Canadian dollar terms…about 5bps tighter than the TD’s domestic issue.
The TD deal is noteworthy as Canadian banks have tended to issue covered bonds in Europe as the basis swap across currencies combined with a deeper market has generally led to better execution (as evidenced by RBC’s deal yesterday). TD, however, had already issued in Sterling and Euro’s this month and looked to the relatively untapped Canadian market for additional demand and found good domestic support for the deal.
In the non-financial space, Canadian Tire (BBB+) issued $650 million of dual tranche unsecured debt in connection with its acquisition of Helly Hansen. The issue included $400 million 5-year notes priced at GoC+99. Unfortunately, the coupons are paid in old Canadian Tire money denominated in nickels, dimes, and quarters. On the plus side, the first 10 investors received a 229 piece chrome socket set, so that’s nice. You know what else is nice? Mrs. Treasury Guy started a job at Canadian Tire and now Treasury Guy gets an employee discount on his 229 piece chrome socket sets!
FOMC
The Federal Reserve increased the target range for its benchmark interest rate by 0.25% on Wednesday…the seventh time since the financial crisis. The hike was expected and puts the target range at 1.75-2.00%. The Fed cited a “solid” economy and “strong” employment as key drivers of the unanimous decision. Updated economic projections including the “dot plot”, which illustrates expected future interest rates, now shows most fed officials see two additional rate hikes coming in 2018, bringing the total to four this year. Although the hike was expected, the policy statement was relatively ‘hawkish’. 5 year US Treasury yields have climbed steadily higher this year from 2.20% in January to around 2.78% today. The spread between 5yr US Treasuries and 5yr GoC’s has widened from about 30 basis points to 77 basis points over that horizon. Not surprisingly, the Canadian dollar has not responded well, sliding sharply against the $USD recently.
Finally
As you must know by now, the world cup of soccer is well on its way and workplace productivity has fallen precipitously as a result. I don’t want to be the guy that throws out the world cup/truancy correlation so I’m going to the bar to watch a bunch of man-babies roll around like they’ve been shot. At least there’s beer. If you’re an Italy supporter, well, it’s only about 1,450 days until the next world cup so hang in there. Speaking of Italy, because I know you care, I rode the Ducati in to work today and it was molto bella!
Ciao!
Treasury Guy