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Rates, securitization and Ontario's new housing tax rules

  • Jason Ellis, Managing Director, Capital Markets

Greetings,

Canadian inflation data was released this morning.  Year over year headline CPI edged down to 1.6% (below expectations for a 1.8% reading) from 2.0% in February and 2.1% in January.  The data is supportive of comments made by the Bank of Canada at its meeting on April 12th suggesting there was “material excess capacity in the economy.”  Don’t look for a hike in rates by the BoC any time soon.

Speaking of the bank, it left rates unchanged at 0.50% last week as expected.   Next meeting is May 24th.  The Fed meets on May 3rd with a small probability (about 10%) of another quarter point hike. 

Rates
Yields are materially lower over the last month.  5 year Canada’s are trading around 1.00% compared to 1.20% on March 17th.   10 year Canada’s are trading around 1.45% compared to 1.75% on March 17th.

Rates fell back a couple more basis points this morning following the softer than expected inflation data.  As one would expect.  Remember, soft inflation is a ‘dovish’ outcome reducing the probability of central bank increasing rates.  Savvy?

Securitization
Last week RBC Dominion Securities issued a slightly seasoned $325 million NHA MBS maturing on June 1 2021.  Of course, by seasoned, I don’t mean spicy, just not newly pooled.  The deal priced at the tighter end of guidance at +55 and was bid as much as 2 basis points tighter in the secondary market.

Earlier this week, Laurentian Bank of Canada issued a new 5 year $350 million NHA MBS maturing March 1 2022.  The deal was well bid and priced at the tighter end of guidance setting a new 1 year low for a 5 year issue at +59.

Also in the news this week is the Bank of Montreal’s plan to issue a $2 billion Residential Mortgage Backed Security (RMBS) comprised of prime conventional/uninsured mortgages.  The deal is the first of its kind from a major Canadian bank.  Banks have tended to use Covered Bonds to fund mortgages that are not insured by CMHC, Genworth or Canada Guaranty.  Of course, it would probably be a mistake to think this transaction as driven by funding.  It’s likely that the AAA tranche of the sequential pay issue would attract pricing that is wider than several alternative funding sources available to the bank.  I expect the bank will retain at least the AAA trance (95% of the deal) and only sell the subordinate notes.  This will allow the bank to reduce the capital held against the otherwise uninsured mortgages.   You can call me pessimistic but this deal DOES NOT harken the arrival of RMBS as a viable source of funding.   Not yet anyway.

Housing
I would be remiss if I didn’t at least mention some of the measures announced by the Ontario government to tackle soaring housing prices.  The core of the plan is a 15% tax on foreign home buyers that will take effect immediately.  If it has the same impact as a similar tax in Vancouver, we should see the results fairly quickly.  Municipalities will also have the power to impose taxes on vacant homes.  The plan also includes sweeping changes to rent control that could have the unintended consequence of reduced investment in new rental unit development.  Time will tell.

Fake News
I know most of you just skip to the bottom to see what nonsense I’ve got to share.   I’m struggling for material, so I’m going back to the beginning.  Kraft Macaroni and Cheese.  My long time readers might remember that early postings featured occasional news items about KD and/or ketchup.  I don’t even remember why.  Anyway, did you know they make something called KD Smart?  It has added ingredients like cauliflower, oats and flax seed blended into the noodles.  WITCHCRAFT!  Cauliflower in KD is a sign of the apocalypse.

Anyway, I’m behind schedule, the marketing peeps are circling my office and I need to begin preparations for tonight’s game.  Have a great weekend.

GO LEAFS GO!

Treasury Guy.
Jason Ellis, Managing Director, Capital Markets