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Jason Ellis reviews 2017

  • Jason Ellis, Senior Vice President and Managing Director, Capital Markets


‘Twas the Friday before Christmas, when all through the building, not an underwriter was stirring, not even an analyst.  Just a lonely Treasury Guy typing a commentary, seemingly, to no one.   

Hello? Is there anybody out there? Just nod if you can hear me…is there anyone at home?

Rates, Rules, and home prices
The pace of growth in Canadian home prices may cool next year as tighter mortgage rules come into effect and as further interest rate hikes dampen the market.

Effective January, new OSFI underwriting guidelines (B-20) will require FRFI’s (aka banks) to calculate borrower debt service ratios using a notional mortgage payment based on the actual mortgage rate plus 2.00%.  A borrower that was close to the maximum debt service ratio before the change may qualify for as much as 15-20% less principal than before.  This will force borrowers to save longer for a larger down payment, modify their purchase plans, or rob a bank.  No just kidding…that’s a terrible idea.  For the record, I don’t recommend that.  The impact of the new rules will be greatest in the higher priced Toronto and Vancouver markets.

In addition to the tougher mortgage lending rules, the Bank of Canada is expected to raise interest rates again in 2018. 

Speaking of rates…
The front end of Canada sold off sharply this week.  Remember…sold off means prices down and rates up.  The 2 year yield up 10 bps and the 5 and 10 year yields are up about 15 bps.    Much of this move has been driven by the steady increase in US yields, but most is due to the hawkish shift to BoC Governor Poloz’s tone in recent days along with strong Retail Sales and CPI data yesterday.  (In most recent news, however, GDP numbers came in just a tiny bit softer than expected this morning, but not enough to really change the mood of the market.  Bonds yields are off just a basis point or two).

Based on overnight index swaps, the implied probability of a hike at the January 17th BoC meeting is almost 50% and a full hike is priced in by March.  In fact, over the course of 2018, the market is now pricing almost three rate increases.   

Year in Review
Here is a table with some numbers and some graphs to help clarify some of the trends that emerged over the course of the year.  I made the table and the graphs myself.  Just so you know.  Amazing right?

You’ll find that rates are higher, the curve is flatter, and credit spreads are narrower.  If I could explain why I probably wouldn’t be here all alone on the Friday before Christmas.  We’ll just have to accept these things as facts and carry on.

The table includes quarterly data points plus all the BoC meeting dates:

Graph 1 Graph 2
Graph 3
Graph 4

See you next year
Every year is getting shorter; never seem to find the time.
Plans that either come to naught or half a page of scribbled lines.
Hanging on in quiet desperation is the Treasury way.
The time is gone, the song is over, thought I'd something more to say.

Merry Christmas…and remember, if you don’t eat your meat, you can’t have any pudding.  How can you have any pudding if you don’t eat your meat?

Shine on you crazy diamonds,

Treasury Guy
Jason Ellis, Senior Vice President and Managing Director, Capital Markets