First National Financial LP

Market Commentary: An update on rates, the BoC announcement and more. Read it here.

  • Neil Silverberg, Analyst, Capital Markets

Nothing says summer is coming to an end quite like your kids going back to school, a new season of NHL hockey starting up and – oh wait… well I guess that’s 2020 for you. We should be used to it by now. On the bright side, at least we still have fantasy football to look forward to. 

As we head into a busy fall season which includes a throne speech (and potential election) from the federal Canadian government, a US presidential election and a roaring housing market, here are your latest updates:

Rates and Curves

Yields on the Government of Canada bonds were slightly down from last week. The current 5yr GoC is yielding 0.37% and the 10yr GoC is yielding 0.58%. That is a decrease of 2bps on both bonds from last Friday, September 4th.

By comparison, US Treasuries are currently trading at 0.26% and 0.68% for 5 and 10 year maturities respectively.

The current 5yr CMB is yielding 0.63% and it was around 0.66% last Friday. The 10yr CMB is yielding 1.02% and last week was 1.04%.

Bank of Canada Rate Announcement

In its policy statement on Wednesday September 9th, the Bank of Canada left the overnight rate target unchanged at 0.25%. The statement maintained that the overnight rate would be left at the effective lower bound until slack had been absorbed and inflation was running sustainably at its target of 2%.

While the central bank acknowledged that the economy is rebounding faster than expected, the optimism was tempered with expectations of a “slow and choppy” recuperation phase.

The statement also reiterated that the quantitative easing program, which was kept at a pace of at least $5 billion in Government of Canada bond purchases per week, would remain in place in some form until the recovery was well under way.

With low rates across the curve, the impact of any future monetary policy changes would be marginal at best. It will be up to fiscal policymakers to make any major additions to the overall level of stimulus if required. With rumors of a larger budget on its way, that may very well be the case.

In case you missed it:

  • OSFI announced on August 31st that there will be no special capital treatment for COVID related deferrals granted after September 30th. The special capital treatment allowed financial institutions offering payment deferrals to continue to treat those loans as performing loans for capital adequacy purposes during the deferral period.
  • August employment rose by 246K (206k full-time & 40k part-time), compared with 416K in July. Employment is still 1.1 million below February levels. However, the effects of the pandemic have been uneven and employment is 99.1% of pre-pandemic levels if you exclude low-wage employees (not seasonally adjusted). The unemployment rate in Canada is currently 10.2%.
  • Merrill Lynch Canada launched a $490MM NHA MBS offering yesterday. The offering was priced at 37 bps over the interpolated GoC Curve. This is the first public NHA MBS deal since Laurentian Bank’s $351MM offering in June which was priced at +61 bps. Recall that TDSI (a unit of TD Bank) launched a RMBS deal at +55 bps back before COVID dominated the headlines meaning we are now at all-time lows! Good news for the Canadian securitization market.
  • Lastly, the BoC is working on a more accurate inflation gauge to close the gap between measured and perceived inflation. This new gauge will be completed by asking consumers how they feel about inflation...I would hope the BoC still prioritizes actual price data and not what a Toronto urbanite who doesn’t own a car feels about the price of gas going up.

Thanks for reading & have a good weekend,