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Latest economic news, new mortgage regulations and bond yields update

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

Good Morning Canadian Mortgage People.

Forgive me.  For those of you who’ve noticed, it’s been a few weeks since my last post.  To be fair, my intentions were good last week.  I had the whole Friday the 13th angle to work with and had lined up all my favourite horror movie quotes for your triskaidekaphobic pleasure.  Alas, my day job got in the way and I never did finish it.  As a consequence, the marketing department has put me on double secret probation and taken away all First National swag privileges until I get back to work.

Before we jump into it, I was reminded that I forgot to go to Port Dover for the big Friday the 13th motorcycle rally last week.   If you know about Port Dover, you know that a Bay Street Treasury Guy on an Italian motorcycle doesn’t really fit in.  That doesn’t matter though.  All that matters is who you ride with.  That’s what makes it so much fun.  That said, this entry is dedicated to my friend and mortgage guy SP.  I’m looking forward to rolling into Port Dover with you on Friday, April 13th 2018. 

So a lot has happened since my last post but there’s no point trying to catch up on all of it.  There just isn’t enough time and let’s be honest, you’d be bored to tears before we got through it all.  Instead, I’ll just stick to my usual topics.

Bond Yields
5’s are trading around 1.70% and are just a couple basis points lower on the week.   For context, the recent high was 1.81%, set about a month ago and it’s been a slow but steady grind lower since then.  I appreciate that some kind of compelling explanation for the lower rates is the value added proposition of a commentary like this, but to be honest, I can’t come up with a cohesive argument.  More buyers than sellers I expect.

10’s are similarly unchanged on the week around 2.02% compared to their recent high of 2.13% back on September 27th.

Spreads
Other than financials which have enjoyed a slow grind tighter, Canadian corporate credit spreads are generally unchanged over the last few weeks.  A new 5 year bank deposit note would come around +77 today compared to +84 at the beginning of September.   The CDX  IG28 index, an investment grade index composed of 125 equally weighted credit default swaps on investment grade issues and a broadly watched indicator of credit is at a 6-month low of 52 (compared to 67 6 months ago and 80 1 year ago).  So that’s nice.

Economic News
In economic news this morning, Canadians are shopping less and not paying too much more than last year for what they are buying.  Retail sales fell -0.3% (MoM) in August compared to +0.5% expected and +0.4% in July. Canadian CPI came in a tick lower than expected at +1.6% (YoY) against +1.7% forecast.  That compares to the prior reading at 1.4%.  Gasoline prices factored heavily in the CPI reading with prices at the pump climbing 14% largely due to weather related impacts to refining.  The data suggests another modest reading for GDP and a dovish BoC next Wednesday.  Probability of a hike is around 15%...down from 35% a week ago.

Mortgage Regulation
I’d be negligent if I didn’t at least mention the new OSFI B-20 mortgage underwriting rules that were released this week.  They come into effect in January.  The headline change is the introduction of the qualifying rate to be used in calculating a borrower’s debt servicing ratios.  Currently, borrowers can qualify for a conventional mortgage (LTV<80%) at the contract rate on the loan.  Going forward, they will have to qualify using the higher of the contract rate +2.0% or the Bank of Canada posted rate (currently 4.89%).  For borrowers who were near the limits on their GDS/TDS ratios, the result could be a significant reduction in loan amount.