Jason Ellis looks at rates, inflation, securitization news and more

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

Good Morning.

In the most important news of the week, Tuesday marked the Vernal Equinox, also known as the first day of spring if you live in the northern hemisphere.  As the earth continues its lonely journey around the sun and the tilt of our axis brings longer, warmer days, I have one word of advice.  Sunscreen.  The long term benefits of sunscreen have been proved by scientists.  I may be ahead of myself.  On a UV Index of 1-10, the most recent observation in Toronto was a 1.  In light of this, I’ll offer one other word of advice.  Floss.  (But trust me on the sunscreen).  


It’s been a bit of a topsy-turvy week.  5 year GoC’s started at 1.98% Monday morning and climbed as high as 2.12% by Wednesday afternoon.  By the end of day on Thursday, yields had retreated to 2.04% in the aftermath of the Wednesday afternoon Fed meeting.  Finally, this morning’s strong inflation data led rates back up to 2.09%.  

If you’re a critic, you’d probably point out that I did nothing more than list a bunch rates with little to no context or explanation.  You’d be right.  


Data released by Statistics Canada this morning showed the annual pace of inflation accelerated to 2.2% compared to 1.7% the previous month.  Core inflation excluding volatile elements like gasoline prices climbed to 2.1% compared to 1.9% last month. 

As you would imagine, inflation is a central piece of the information that influences the Bank of Canada’s interest rate decisions and, with both readings above the bank’s 2.0% target, another hike could come even sooner than previously expected.  Bond yields climbed 4-5 basis points on the news.

After leaving the target overnight rate unchanged at 1.25% back on March 7th, the implied probability of a 25 basis point hike at the April 18th meeting is about 40%.  Trade concerns with the US may yet weigh on that decision. 

The Fed

Speaking of central banks, the Federal Open Market Committee (aka the Fed or FOMC) met on Wednesday and raised its benchmark target rate by 25 basis points for the sixth time since it began raising rates from near zero levels in December 2015.  The increase was widely expected and puts the new benchmark funds range at 1.50%-1.75%.  Along with the increase was another upgrade in the Fed’s economic forecast and the suggestion that the future path of rate hikes could accelerate.   


MCAP announced its highly anticipated Residential Mortgage Backed Security (“RMBS”) this week.  In case you’re unclear on the difference, an RMBS is composed of low ratio (<80% LTV) uninsured mortgages where NHA MBS are made up of Insured mortgages.

The $247 million Pass-Through deal features a $233 million AAA tranche supported by 6% credit enhancement through subordinated notes.  Indicated spread is in the GoC+100 range which is great value for the investor.  The prime collateral (not to be confused with ‘alternative’ or ‘alt-a’ mortgages) was carefully curated, and those willing to do the work to understand the asset, should be well rewarded.  While it might seem counterintuitive as a competitor, I’m definitely rooting for MCAP on this one.  The development of an RMBS market in Canada would be a good thing.

Final thoughts

There seems to be an expectation that these innocuous posts end with amusing non-sequitur.   To that end, since I rarely have an original thought worth sharing, I will borrow from another source to leave you with the following additional advice which you can consider a bonus after the tips about sunscreen and flossing above.

Whenever you get that “glass half empty” feeling…just add vodka and stir.

Have a great weekend,

Treasury Guy