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Findings from Bank of Canada's meeting

  • Jason Ellis, Managing Director, Capital Markets

Good Morning.

I have to admit that my world continues to revolve around the changes to mortgage insurance that we've dropped so many bombs at the beginning of the month.  But at some point we need to rally past it and just get back to work.  So the Department of Finance has put us on ‘Double Secret Probation’.  That’s OK.   Nothing is over until we decide is! And now for your regularly scheduled update on rates and spreads. 

If you know me, you already know that I know, that you know, that I know, that you know, that I have NO idea where rates are going.  I can, however, tell you a little about where they are now, and where they’ve been recently.  And that’s why I get paid the big bucks. 

In up to the minute news, retail sales came in softer than expected and CPI was in line with forecasts this morning.  In combination, the data keep the door open for more stimuli from the BoC.  Bonds are rallying sharply.  Rates are now 5bps lower on the day and 14bps lower since last Friday.

The benchmark 5 year GoC bond is currently trading at 0.64%.   To put this in context, the benchmark started 2016 at 0.70%, traded as high as 0.92% in April, as low as 0.52% in July and has averaged 0.67% this year.

The benchmark 10 year GoC bond is currently trading at 1.13%.  To put this in context, the benchmark started 2016 at 1.40%, traded has high as 1.53% in April, as low as 0.96% in September, and has averaged 1.19% this year.

Among the more obvious things influencing bond yields this week was the Bank of Canada meeting on Wednesday.  The BoC left rates unchanged, but the Monetary Policy Report (“MPR”) showed that the council “actively” discussed a rate cut.  (That’s decidedly ‘dovish’).  This triggered some buying and 5 year bonds rallied $0.20 (or fell about 5bps) over the course of Wednesday morning.  Mr. Poloz also referenced the newly introduced rules on mortgages which he called a “welcome development” that should “mitigate financial vulnerabilities over time”.  That said, the bank lowered its GDP forecast over the next two years with a significant part of that revision attributable to the recent rule changes.  The bank next meets on December 7th and the probability of a rate cut is around 15% (up from just 5% last week).

In the world of spreads, things are materially better than they were at the beginning of the year.  A popular barometer for credit spreads are Senior Bank deposit notes.  These are liquid and easy to track.  They are also interesting as the banks’ lending rates are closely tied to deposit note spreads.  5 year deposit note spreads peaked in the middle of January around +150 and have steadily narrowed to around +99 today.

In the CMHC space, 5yr CMB and NHA MBS spreads are at their lows for 2016 too.  A new issue 5yr NHA MBS traded in the high +90’s in January.  Current market is +80.  5yr CMB was as wide as +55 in January and is now around +40. 

I think I’ll leave on that positive note. 

Have a great weekend,

Treasury Guy
Jason Ellis, Managing Director, Capital Markets