First National Financial LP

A look at the CMBs, yields and the latest GDP numbers

  • Andrew Masliwec, Analyst, Capital Markets


So it’s March now, which means spring is around the corner. You wouldn’t realize it since Toronto is still covered in a mix of salt, ice, brown snow and discarded ‘roll up the rim’ Tim Hortons cups. It’s truly a winter wonderland out there.  The good news? Wiarton Willie said we would have an early spring. I don’t know about you, but I’m watching the Sopranos for a second time and I’ve learned not to trust any rats.

What’s that? You want more interesting March facts? You came to the right place:

  • March comes from the Latin word ‘Maritus’, named after the Roman God of war, Mars.
  • March used to be the beginning of the Roman calendar and began the season for warfare.
  • Shout out to my sister, March 20th is National Dietitian’s day in Canada and all of March is National Nutrition Month. Eat your vegetables.
  • On the flipside, March also brings us National Frozen Food, Corn Dog Day and Celery Month in the USA. Nothing pairs better with corn dogs than celery.

Economic News

March also brought some bad news this morning for the Canadian economy. The “Sunny Ways” of the economy took a slide in Q4, with GDP growth coming in at 0.4%. This underperformed the market consensus of 1.0% and was lower than even the lowest economist prediction. Overall, the entire release was downbeat with multi-year lows in household spending and business investment.  Real gross national income fell 1% which was largely owed to lower export prices of crude oil. Housing, a hot button issue for the BoC, drove much of the weakness in GDP. Housing investment fell 3.9%, with the largest decreases in new construction (-5.5%), renovations (-2.7%) and ownership transfer costs (-2.6%).  Although these are simple rates of change, this is the biggest decline in the sector since Q1, 2009. Don’t blame me, I’m a millennial!

Last Friday also brought CPI, also known as the measure of inflation in our economy. That came spot on with consensus at +0.1% for January which brought year-over-year CPI tracking to 1.4%. This is under the target level the Bank of Canada uses, at about 2.0%.  No inflation-hawks here.

So what does all this mean? Well, looking forward to next week, there is about a 1% chance that the Bank of Canada raises the overnight rate at their Wednesday meeting. That might as well be zero because the BoC is in the business of not surprising market participants. In fact, with the slowing economy there is a non-zero probability of easing interest rates.  There’s about a 30% chance of rate hike in December, 2019.


So what happened with interest rates? Well compared to last week, the 5 year is virtually unchanged as it is sitting at about 1.80%. The 10 year is wider by about 3bps week over week and is trading at about 1.93% this morning.  On the credit curve, 5 year Canada Mortgage bonds are trading at lower yields this week at 2.11%. This is down 2bps from last week where it traded 2.13%. That’s about a whole 16bps lower than this time last year! The 10 year CMB is tighter by about 3 bps this morning on the back of the GDP news, with 10-year money yielding about 2.37% this morning.  That’s 23bps tighter than this time a year ago.

Speaking of the 10 year CMB, the reopening of the 12/15/2028 maturity came and went in February while the whole marketing team was on vacation. The market and issuers like yours truly were surprised when issuer allocation sizes came in much smaller than expected. What does that mean? Well it looks like CMHC is moving the market towards 5 year funding. For borrowers, 10 year money could be harder to come by and you could expect spreads to move accordingly.  Aside from that, the deal was well received and the upcoming 5 year deal is poised to be similar, with pricing coming the week of March 13th. Let’s hope sizes in the 5 year space make up for the 10 year flop. 

Other News

Both world leaders with surnames starting with T were the subject of testimonies over political scandals this past week. It just goes to show if you have good or bad hair, you don’t get a free pass in the global political landscape.  A lot of the noise surrounding the world leaders have yet to truly touch the markets, but if things turn for the worse, you could see wide reaching implications. The other big unknown is the China-USA trade deal that has yet to be reached. The original deadline was today, but that got pushed.  You’ll know when I know on that front – unfortunately these commentaries don’t grant me special access to world leaders. Yet.

On the securitization front, the Bank of Montreal is firing up their home equity lines of credit (HELOCs) conduit. Fortified Trust, as the unit is called, will be reaching out to investors beginning today per Bloomberg News. This is interesting news for investors and users of securitization products.  HELOCs reached a record of $243 Billion as of Oct 31st, 2018. This is about 11.3% of all household credit and the highest share since mid-2015 per DBRS. HELOC’s fund everything from home renovations to snowmobile purchases. In my opinion, both good uses of credit.

Have a good weekend and even better March,

Andrew Masliwec