Jason Ellis looks at the latest in government bond yields

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

Greetings mortgage market participants,

Forgive me gentle readers.  It’s been a month since my last post and it feels like at least twice that long. 

In my defense, I’ve been occupied by some ‘deep thoughts’ that have kept me distracted.  For instance, I’ve been thinking that maybe to understand mankind we have to look at the word itself: “Mankind”.  Basically, it’s made up of two separate words, mank and indWhat do these words mean?  It’s a mystery, and that’s why mankind is too.

I’ve also been thinking that if dogs ever take over the world, and they choose a king, I hope they don’t just go by size, because I bet there are Chihuahuas out there with some good ideas.

Economic Data

Today’s data featured two top tier Canadian reports, Retail Sales and Consumer Price Index (“CPI”).

Month over month retail sales in May came in at +2.0% and +1.4% ex-autos, exceeding expectations of +1.0% and +0.5% respectively.  Headline CPI for June came in a little hot at 2.5% year over year vs. 2.3% expected and 2.2% last month  ‘Core’ CPI came in as expected a 1.9%, right around the BoC 2.0% target.


Rates have jumped about 4 basis points higher on today’s data but Government bond yields in Canada continue to be relatively range bound.  5 year GoC’s are around 2.06% and have traded between 2.00% and 2.10% the last five weeks.  10 year GoC’s are around 2.15% and have traded between 2.10% and 2.20% over the same horizon.  Yes…you read that right.  There are less than 10 basis points between the 5 and 10 year benchmarks.  In fact, there are only 20 basis points between the 2 year (1.95%) and the 30 year (2.15%) bond.  It’s a flat curve all right.  Flattest it’s been in a decade.  I don’t want to alarm you, but your first year Economics text book will tell you that a flat yield curve is an indication that investors and traders are worried about the macro-economic outlook.  A less pessimistic argument is that it’s only natural when a central bank is raising short-term interest rates.  Whatever the reason, if you’re getting a “glass half empty” feeling, just add vodka and stir. 

Speaking of central banks, following the July 11th rate hike, the next BoC meeting is September 5th.  The implied probability of another then hike is a modest 10%.  No doubt lingering uncertainty with respect to NAFTA, auto tariffs and broader trade drama are creating headwinds.  Despite the small pop in rates this morning, the market won’t lean too heavily on the modestly stronger than expected retail sales and CPI data today.

Securitization news

On Wednesday, RBC priced a new offering of CMBS in the form Real Estate Asset Liquidity Trust, better known as REAL-T.  It’s the second Canadian CMBS transaction of 2018 and the sixth issuance of REAL-T since its post liquidity crisis return to the market in 2014.

The simple senior/subordinate sequential pass through structure featured a 3.5 year A-1 note and a 7.5 year A-2 note.  Both rated ‘AAA’ by DBRS and Fitch with 13.25% credit support from subordinate notes.  The A-1 priced at GoC +105 and the longer A-2 priced at GoC+155.  An attractive spread for a ‘AAA’ note considering the current delinquency rate on all outstanding Canadian CMBS issuance since 1998 is a microscopic 0.08%.  For context, the last REAL-T deal was issued in October 2017 and the A-1/A-2 notes were priced at +125/+175 or 20bps wider than this week’s deal.

The roughly $350 million pool was made up of 70 loans across 140 properties with loan to value < 60% and a weighted average remaining term of 6.67 years.

No new ‘syndicated’ NHA MBS deals to mention but the indicative spread for a new 5 year single family residential pool is around +48, virtually unchanged since January.  That’s impressive considering Bank Deposit notes have widened since January from about +65 to +90.  The outperformance by MBS can be partially explained by reduced issuance compared to last year and the special utility of MBS for Federally Regulated Financial Institutions (“FRFIs”) as Tier 1 High Quality Liquid Assets (“HQLA”).

Finally, CMHC’s call for allocation requests came out yesterday for next month’s 10 year CMB issue.  It will be the first opening (of three) for the new December 2028 maturity date.  Yes…it’s 124 months for the price of 120!  Send in your deals!

Heading into the weekend

Take it easy this weekend and remember, it’s always a good idea to carry two sacks of something when you walk around.  That way, if anybody asks “Hey, can you give me a hand?”, you can say, “Sorry, got these sacks”.

Sometimes I wish I were a nicer person…but then I laugh and continue my day.

Treasury Guy OUT!