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Jason Ellis comments on new economic data and a possible rate hike

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

Good Morning Mortgage People.

Welcome to another edition of the fake news.  To be fair some of the content below is based on actual facts, but the associated commentary should be taken with a grain of salt. 

Before I get started, if there are any residential broker types reading this, thanks for having me at the big MPC conference in Niagara this weekend.  I had lots of fun.  Example?  I remember one person late on Sunday night quoting Col. Saunders who said “I’m too drunk to taste this chicken”.  Well said.  Well said.

Economic Data
Canada had a very active calendar today with GDP, employment data and manufacturing PMI.  I know you’re too shy to ask so I’ll just tell you that PMI is Purchasing Managers Index.  Higher is better. 

  • September GDP year over year was +3.3% as expected.
  • November net change in employment was +79.5k compared to 10.0k expected.
  • November unemployment rate was 5.9% compared to 6.2% expected.
  • November PMI was 54.4 compared to 54.3 the previous month.  Meh.

Clearly, the headline here is the employment data.  Note how I employed a bold font above to emphasize that.  Hiring in November surged beyond expectations sending the unemployment rate to a nine-year low. 

Bank of Canada
The bank meets next Wednesday December 6th.  Prior to this morning’s strong employment data, the probability of a rate hike next week was around 5% and the probability of a hike on January 17th was around 30%.  After the news, those probabilities have moved to roughly 10% and 45% respectively.  A rate hike is definitely in play in the first quarter.

Bonds are predictably selling off this morning.  Remember, strong economic data increases the probability of central banks reducing stimulus through monetary policy action (aka: rate hikes).  Unexpected surges to employment will almost always turn the BoC ‘hawkish’ and result in bond selling.  When rates go up, prices go down.  But you know that by now.

5 year GoC’s are trading around 1.67% and are 4bps higher on the day.  10 year GoC’s are trading around 1.91% and are 2bps higher on the day.

In addition to today’s employment data, we can also point to oil prices as relatively supportive to our economy.  OPEC and Russia are extending oil output cuts and that is good news for the energy sector.  West Texas Intermediate (WTI) is hovering around its two-year highs at $58.31/barrel.

Stock markets continue to set all-time highs.  The venerable Dow Jones Industrial Average is up 22% year to date and is trading over 24,000 for the first time ever.  Here at home, the TSX composite has lagged, only up 5% year to date, but also around its all-time high set earlier this month.  The air is getting pretty thin up here, no?

New issues and spreads
RBC printed a $2.25 billion 5 year deposit note priced at GoC+73bps yesterday.  High grade credit spreads continue to perform well and the market is definitely giving off a ‘risk-on’ vibe.  That makes me feel tingly all over.  Here’s an example of how giddy investors are for new paper.  Oxford University just issued a 100-year bond.  You’ve got to be feeling pretty comfortable with the market to buy a bond that won’t mature until long after you’re dead. 

In other news, Black Friday and Cyber Monday happened.  People bought record amounts of crap they don’t really need.   In addition to record sales, according to sources at Wal-Mart, customer casualties were also up 10% year over year.  One shopper was quoted as saying, “You put that TV down.  I will come at you like spider-monkey!”  Later, the individual apologized, admitting that he was “all jacked up on Mountain Dew” at the time.

Given the surprising employment data today and the resulting shift in investor sentiment, I thought I’d take a moment to answer a question I’m frequently asked.  Many often wonder how traders manage to stay cool while under the stress of volatile markets.  I learned early in my career from a veteran trader on my desk named Reese Bobby.  He said “you’ve gotta’ learn to trade with the fear.  There ain’t nothin’ more frightenin’ than trading with a live cougar in the office.  If you’re calm, that wonderous big cat will be calm too.  But if you’re scared, that beautiful death machine will do what God made it to do, namely, eat you with a smile on its face.”  So the short answer is that I keep a live cougar in my office at all times.

It’s Friday…Shake & Bake!

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