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Market Commentary: An update on the markets during a global pandemic

  • Thomas Kim, Vice President and Managing Director, Capital Markets

Salutations.

It has been some number of weeks since we started WFH. Who remembers how many weeks? Who remembers what the outdoors look like? Who remembers the last time Trustin Judeau shaved? 

Uncertain times manifested themselves in market volatility. The Bank of Canada (“BOC”) lowered its benchmark policy rate by 50bps--three times. The 5yr Government of Canada bond yield (“GOC”) dropped 120bps from a recent high in January, bounced up 45bps, and then came back down. At time of writing, it's now at 0.44%. The spread between 10yr and 5yr GOCs went from minus 1-3bps in January (10yr yields were lower than 5yr) to over 20bps (10yr yields are higher than 5yr yields) this week. These are big moves.

Relationships between instruments broke down. We have become used to "rates" (for all the things) going down as the BOC lowers its policy rate. Here is an example where that didn't happen: from mid-January to mid-March the 5yr GOC yield went down 100bps but big bank funding spreads went up by 70bps... before moving up an additional 150bps. So funding costs (for all the things other than GOCs) were actually going up dramatically while Canada yields fell. Another example: asset backed commercial paper ("ABCP") spreads have typically tracked closely to CDOR. During this time the spread between these two blew out 50bps. CDOR itself is much elevated from "normal" times versus benchmarks such as overnight index swaps ("OIS").

Uncertainty and volatility beget illiquidity. At various times, bond traders have described their markets as broken. This is bad. In response, the BOC announced that it will buy all the things: GOCs, T-bills, Canada mortgage bonds, provincial bills, provincial bonds, bankers acceptances, commercial paper, ABCP, and corporate bonds (excluding banks). They have expanded the scope and scale of its lending and repo activities by permitting more types of collateral, more eligible counterparties, and longer terms. In the mortgage sector, the CMHC launched a modified version of its insured mortgage purchase program ("IMPP") to provide an emergency backstop for the NHA MBS market. All of this has more or less worked.   

To sum up, markets got really bad and then they got less bad. But this too shall pass, we'll see the outside world again, and the prime minister will finally shave. 

A final note about First National:  Our Treasury and Origination teams have worked together to navigate these difficult and choppy times to continue our solutions based lending programs with offerings of short term insured term products from 1 to 5 years, construction programs and conventional bridge financing.  All the while we also continue to fund our extensive 10 year insured pipeline.  It is business as close to usual as possible.