Market Commentary: An update on bond yields and what it means to borrowers

  • Andrew Masliwec, Analyst, Capital Markets


We’ll keep this commentary brief today. If you didn’t know, the days are only getting shorter and winter starts in 128 days. Carpe Diem.  So hopefully you are reading this on a dock somewhere with an Aperol Spritz (the proclaimed drink of the summer). If not, at the very least hopefully your office/cubicle/hoteling station has a window that’s awkwardly reflecting sunshine on your computer screen.  I mean, that’s what I got going for me.

It truly is the little things in life.

Rates and Bonds

What happened to yields this past week? If you are a borrower you are in good luck: bond yields have gone down.  The current GoC 5 year is yielding 1.38% and the 10 year is yielding 1.46%. Compared to last Friday, the 5 year is 3 bps lower and the 10 year is 4bps lower. That’s almost a parallel shift in the yield curve like you learned about in Econ 101.

The CMB curve has reacted similarly week over week. The current 5 year CMB is yielding 1.70% and it was around 1.73% last Friday. The 10 year CMB is yielding 1.86% and last week was at 1.90%. I told you it was similar to the Canada curve. Compare these bond yields to this time last year, and the 5/10 CMB and GoC’s are all about 81-84 bps lower.

On an interesting note, maybe only to me, looking at the Canadian yield curve, the lowest yielding bond is actually the 5 year Government of Canada. If you are not familiar, this is not a typical curve. Historically, yield curves plotted by yield and tenor would have an upward slope due to things like liquidity and term premiums. In other words, right now it’s more expensive to borrow short term, say like 3 months out (yielding 1.64%) than it is to borrow in the 5 year market. What does it mean? It could mean that, relatively, our curve is the flattest in the G7 so it’s sort of moot.  Or it could mean that 5 year bond yields are really low and 5 year commercial mortgages sound like a pretty good deal right now. If you’re interested, I know a couple guys and gals.

On the bond issuance front this week, we had Export Development Canada price $500 Million of 5 year bonds at a spread of +31.5 bps over Canada’s. Which is funny, because 5 Year CMB’s trade at a spread of +31 bps over Canada’s. And they are backed by NHA MBS.  And there’s $11.5 billion outstanding. Ugh.

Other News

No major economic news for Canada this week. I have been told that the statisticians at StatsCan are busy putting together their fantasy football pre-draft this week. We did receive Wholesale Trade Sales Month-over-Month numbers, which came in lower than expected for May. The surveyed expectation was +0.5% and the result came in at -1.8%. This didn’t move the needle much as forecasts for next week’s Q2 GDP release being unchanged at +2.2%.

The major release was south of the border and no, I am not talking about the Mueller report. US GDP came out this morning which was a mixed bag. The “annualized” quarter-over-quarter number came in higher than expected at 2.1% versus the surveyed 1.8%.  This doesn’t support rate cuts by the fed. However, weak business investment and export numbers were worse than expected. This does support rate cuts.  There is a 100% chance the fed cuts rates next week, with an 83% chance of a 25 bps cut and a 17% chance of a 50 bps cut.

Finally, in the most perfect article by the CBC, millennials are apparently more likely to pick a partner based on similar home aspirations than good looks. Only 2.7% of respondents to a survey said they picked partners on good looks versus 12.7% who picked property-related qualities. I think I read about response biases in a psychology book once.

Anyways, there you have it. Forget about swiping right fellow millennials, you’re better off going on MLS and finding the proper square footage and backsplash before you find the one.

Enjoy the avocado-toast brunch this weekend!