Sorry I missed last week’s post. Treasury Guy was doing important market research at the Structured Finance Industry Group (SFIG) conference. The fact that it was in Las Vegas had nothing to do with my decision to attend. I’d share some of the highlights and more interesting developments in the securitization market, but, you know, what happens in Vegas stays in Vegas. Since we’re on the topic, I’d like to send out a special thank-you to Frank the Tank (you know who you are) for redefining the art of business development. ‘Nuff said.
I’m currently at home waiting for my HVAC guy, so I don’t know how this turned out, but I can tell you that at 8:30 this morning US Change in Nonfarm Payrolls and Canadian Net Change in Employment figures were released. Nonfarm Payrolls were expected to grow by 200,000 jobs while Canadian employment was expected to fall by 5,000. Check the ‘international network’ for details on how that played out. Remember…if the employment comes out STRONGER than expected, bond yields should move higher (prices lower). Employment is inflationary and strong payroll data gives the Fed another excuse to raise rates next week.
Speaking of the Fed, the FOMC meets next Wednesday March 15th at 2:00pm EST. The implied probability of a hike is now at 100%...which sort of takes the fun out of it, right? The Bank of Canada next meets on April 14th. The probability of a rate CUT has fallen to 0%. Probability of doing nothing is about 100%.
As of the close on Thursday evening, 5 year GoC’s were yielding 1.25% and 10 year GoC’s were yielding 1.81%. Those yields are up about 16bps and 21bps respectively compared to two weeks ago.
Securitization and Credit Spreads
This week’s lead story in mortgage securitization was the new Merrill Lynch Canada ‘Jumbo’ NHA MBS deal. Merrill issued $1.46 billion into very strong demand at GoC+60. Merrill’s last issue came in January at +70. This is largest single tranche syndicated MBS yet. On the break, the bonds are trading 2-3 bps tighter. There continues to be a strong bid for NHA MBS on expectations of reduced insured/insurable mortgage origination in light of new insurance rules. Suffice it to say that market conditions are highly conducive for syndicated MBS issuance. Like I always say…issue early and issue often.
Also of note in the new issue space this week was the $1.5 billion 5 year RBC deposit note at +80. That’s in about 15 bps since January. Some out trades were reported (investors selling shorter, older paper to roll into the new issue), but the deal was otherwise well received.
Canada Housing Trust is set to launch a new ‘5 year’ CMB issue next week. We’re expecting a new June 2022 maturity date on Tuesday, ahead of the FOMC rate announcement on Wednesday. Probable issue size is $5.0-$5.5 billion. CMB bonds currently looks cheap relative to Ontario’s compared to where they were trading at the last 5 year issue in December. That will hopefully be constructive for the new issue.
In regulatory news…and this is pretty positive if you’re a Treasury Guy, OSFI has extended the domestic implementation timeline for the revised Net Stable Funding Ratio (“NSFR”) until January 2019. OSFI is still committed to the new standard but it is uncertain key foreign markets will implement by the original January 2018 deadline. For context, the NSFR (set by the Basel Committee on Banking Supervision) requires banks to maintain a stable funding profile relative to the composition of their assets and off-balance sheet activities. Managing to these new guidelines will materially increase the cost of providing liquidity and can manifest itself as higher fees for a variety of banking products and services including mortgage warehousing and Asset Backed Commercial Paper programs. That’s a bad thing.
The Trump International Hotel and Tower has been for sale but no one has stepped up with a bid. The building isn’t actually owned by the Donald or any of his companies, but the Trump brand probably hasn’t helped. The fact that half of the residential units in the building remain unsold probably hasn’t helped matters either. All rooms come fully wire tapped as a standard feature.
Finally, don’t forget that daylight saving time (“DST”) starts at 2:00am on Sunday (at least it does here in Ontario). Turn your clock forward one hour Saturday night. Sunday morning will get here sooner, the sun will rise later, but evening will be longer. Apparently, DST was created to save money on candle wax, which makes sense because my wax bills have been brutal lately.
In related breaking news, Donald Trump has reportedly just signed another Presidential Order. Not only is he cancelling DST, but the US is officially moving to a 25 hour day.
Have a great weekend (all 50 American hours of it),
Jason Ellis, Managing Director, Capital Markets