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An overview of this week’s bond yields

  • Andrew Masliwec, Analyst, Capital Markets

Greetings mortgage people,

As many of you are all still recovering from the real estate forum that took place this week in Toronto, I will get right into the thick of things. The last thing I want is for you to doze off and nothing keeps our readers more engaged than hard-hitting interest rate news.

Rates

Bond yields are lower this week on the back of refreshed uneasiness in the Canadian market. In fact, looking at the 5 year GoC yield from two weeks ago, we closed at 2.37% while as of writing we are trading at about 2.20%. That’s a 17 bps slide in the benchmark. The 10 year bond faired similarly as it’s currently yielding 2.27% while two weeks ago the bond closed at 2.45% - a drop of 18 bps.  While stating this is great for me because it helps fill up my minimum word count of 200 words, it’s also important to show how quickly yields can change for you, the borrower. As you know, rates change daily. They can go up, down or sideways, in your favour and out of favour, but if you are happy with where they are today, take out the uncertainty and let us help you in fixing your ideal rate with First National.

Credit spreads, those bonds which are quoted at a yield above the aforementioned benchmark bonds, have widened notably the last two weeks. You may have also noticed that your portfolio looked a bit worse off over the last couple weeks. Or much worse off if you own bitcoin or weed stocks. You would be correct that the equity market, except for a few green days, has been sliding since October. When the equity market suffers, you also see spill over into the credit space as investors move away from “riskier” bonds. In fact, by one bank’s estimate, the new issue concession for debt was 10-15 bps wider week over week. Meaning, it seems that investor appetite for credit is lower and is now more expensive for issuers. This of course has impacts on the credit bonds we follow closely- Canada Mortgage Bonds. The 5 year CMB is currently yielding 2.51% and the 10 year is yielding 2.71%. For context, the 5 year CMB spread is nearing 6 month highs and the 10 year CMB spread is at a year high of 44 bps.  What you need to know: CMB’s are widening and you could potentially, maybe, see higher yields.

The Fed, USMCA and GDP

Wednesday was highly anticipated by markets when the U.S Federal Reserve Chairman Jerome Powell gave a speech. Overall, the market reacted to the speech as being “dovish” as he mentioned that the US Fed will not raise rates on a preset path.  Powell mentioned that US rate policy is just below neutral interest rates (the natural level of interest to match inflation and keep the economy at full employment). The market interpreted this as possibly, probably, less rate hikes in the future. On the back of the news, the equity markets had a green day with the S&P raising 2.3% - the highest in 8 months.

Today also had two important events in Canada:

  • Q3 GDP numbers were released, which was bang on with the consensus of 2.0%. The month-over-month for September was worse than expected coming in at -0.1% vs +0.1% expected. Disappointment was focused in business fixed investment and domestic demand. More concerning is the trend of domestic demand (consumption in the economy) shrinking from +2.2%, 1.8% and -0.1% in Q1, Q2 and Q3 respectively.If you were wondering how higher interest rates were effecting GDP, residential investment was down 0.5% and consumer growth was weaker than expected. The odds of a rate hike in December by the Bank of Canada were unmoved on the news, remaining constant at around 20%.
  • In sunny beautiful Buenos Aires, the USMCA was finalized and signed by the three nation’s leaders. So now we can stop talking about NAFTA and talk about this new deal with a less visually appealing name. Overall, this is a good step forward and takes some uncertainty out of the market.

Everything Else

Looking forward, this weekend has an important meeting between Trump and Xi Jinping, the Chinese president. The G20 is happening in Argentina and the two aforementioned leaders embroiled in a trade war are scheduled to meet on Saturday. No word yet if Argentinian beef or Trump brand steaks will be served. I’ve heard good things about both. A good outcome to this meeting should stabilize equity markets and credit spreads, but your guess is as good as mine for the outcome.

It’s worth mentioning Black Friday came and went in the USA. Some stats from our friends at TD:

  • Net sales at U.S. malls and brick-and-mortar stores fell 4%-7% Y/Y on Thanksgiving Day and Black Friday, while foot traffic fell 5%-9% over the two days.
  • Online sales skyrocketed more than 23%, crossing $6B.

The impact of these numbers will be reflected in Q4 GDP numbers – I am sure you can’t wait. Doing my own research, my inbox received 83 emails on Black Friday deals, a YoY increase of 14%, but purchases stayed constant at 0%. I guess there’s always next year.

Have a good weekend,

Andrew