A review of credit spreads and what it means for you

  • Andrew Masliwec, Analyst, Capital Markets

Greetings Mortgage People,

How is everyone doing out there? It’s been a while since our last commentary. It’s not because we don’t care, it’s because we care too much.


Where have bond yields gone? That’s a good question. Only three months ago there were legitimate feelings that 5 year and 10 year yields would be equal, rates would keep going up and Nylander would put up at least 60 points in a season.  The market today is much different. The 5 year Government of Canada bond is yielding around 1.90% and the 10 year is yielding 1.97%. The shape of our yield curve has taken a more “normal” shape over the last couple months as well, with the short end having lower yields than the long end (10s, 20s, 30s).  If you recall there was a talk about the flatness of the yield curve in the past, I guess that’s no longer an issue!  A year ago, these same benchmark bonds were yielding 2.06% (5s) and 2.26% (10s).

On the credit side, CMB’s have also seen a large decrease in yields. The current 5 year CMB is trading at 2.26% and the current 10 year is trading at 2.47%.  A whole year ago, the 5 year CMB traded at 2.33% and the 10 year traded at 2.59%.  That’s an important thing to remember when people clamour for BoC rate hike probabilities. Since last January, we’ve had two rate hikes in 2018 (July, October) for 50 bps total and often quoted bond yields are lower than they were before the rate hikes. Even taking a look at the very short end of the curve you have current 3 month T-bills trading only 40bps higher than this time last year. Clearly, inflation expectations are lower now and there isn’t much of a term premium on the longer end.

What does that all mean for you, a potential borrower or mortgage investor? Well, credit spreads have been tightening after the recent sell off in December, which is often a sign of a move to a healthier market. However, the aforementioned sell off in December really widened out the credit space. Deposit notes are still 20bps wider since 3 months ago and debt issuance in Canadian dollars is still low to start the year. Hence you are seeing conventional mortgage spreads also following a similar wider path.

Overall, yields are down across the board though. Therefore, you could expect this to be a good environment for increased debt issuance, since debt is cheap.  Everybody may be doing it. You want to be cool don’t you? Luckily for you, First National has an early rate lock program, which will help you take advantage of the current low rates.

Other news

How’s our economy doing? Well, January 4th brought news that our unemployment rate was higher than expected, at 5.7%.  That’s not amazing, but it’s only a bit worse than was expected at 5.6%. CPI also came and went last week, coming in hot with a reading of 2.0% YoY vs the 1.7% expected. Typically this could cause a shakeup in the market. Instead most of the increase, or about 0.27% of it, is being blamed on the airline category. Air transportation as a category was up 21% month-over-month for December. I also took a flight in December, therefore, that number must be true.  If you want something to look forward to next week, there is an important economic release with GDP being released on Friday.  

Other news

Not much else has happened, except:

  • The US Government has been shut down for 35 days while democrats and republicans fight over the funding of a border wall,effecting everything from IPO’s to StatsCan data
  • Canada arrested a Chinese National, China arrested Canadians, tensions have arisen
  • Switzerland is still Switzerland, no tension, except Billionaires flying to Davos on private jets
  • The odds of a Bank of Canada rate hike in 2019, at all, is only about 64%
  • The Patriots are back in the Super Bowl

So I guess you could say you are now all caught up! Here’s hoping the only total shutdown we hear about this time next week is Aaron Donald on Tom Brady.

Have a good weekend,