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Market Commentary: An update on this week’s interest rates and bond yields

Jul 19, 2019
Capital Markets update
Jason Ellis, Chief Operating Officer

Greetings Mortgage Market Participants,

It’s the morning after the First National Social Committee Boat Cruise and as I sit here writing this I’m getting the feeling attendance and productivity might suffer around here today.  I haven’t heard the official HR report yet but hopefully everyone conducted themselves admirably.  Treasury Guy had to miss the cruise so I’ll use this quiet time around the office to get caught up on some of what has transpired since my last posting on Payroll Friday two weeks ago. 

You may recall that bonds sold off aggressively following strong payroll reports on July 5th.  5 year GoC bond rates flirted with 1.60% in the days that followed compared to trading as low at 1.30% at the end of June.  Since then, bonds have rallied and 5 year yields are all the way back down to 1.40%. 

Why exactly are rates back down 20 basis points over the last week and a half?  It’s classified.  I could tell you, but then I’d have to kill you.  Definitely more buyers than sellers.  Consumer Price Index data came out pretty much as expected at 2.0% on Wednesday but the bond market knee-jerked higher any way.  The rest of the move can be largely attributed to comments made by FOMC members that stoked the idea that the Fed could possibly cut as much as 50 basis points at its meeting next week.  The Fed has since come out publicly to ‘clarify’ the ‘academic’ comments and moderate market expectations.  Privately, the offending Fed members are being water boarded in Guantanamo Bay.

In news related to interest rates, the Bank of Canada 5-year Benchmark qualifying rate is (finally) changing from 5.34% to 5.19%.  It’s been a year since the rate increased to 5.34%.  The move is long overdue as the spread between actual mortgage rates and the benchmark has widened significantly.  Residential mortgage borrowers must qualify at the great of coupon +2.00% or the benchmark rate.  Given that actual 5 year mortgage rates are below 3.00%, the benchmark rate has long been the limiting factor in borrower qualification.  At the margin, this is a bullish development for residential borrowers.

New Issues

On Wednesday Eagle Credit Card Trust (aka PC Financial) issued a $250 million ABS offering featuring a $232 million 5 year AAA note priced at GoC+77.

Yesterday, Scotiabank issued at $1.1 billion 5 year NHA MBS pool.  It’s the fourth syndicated NHA MBS offering so far in 2019 bringing total issuance to $2.7 billion compared to $1.2 billion at the same time last year.  The deal priced at the tight end of the range at GoC+46.  That’s 6 basis points tighter than the last syndicated issuance in June by Laurentian Bank at +52.  Good news for Treasury Guys everywhere.

Also yesterday the Royal Bank launched a $1.5 billion Non-Viability Contingent Capital (NVCC) Subordinated Note rated ‘A’.  The deal priced at tight end of indicative spreads at GoC+132.  In a trigger event, NVCC notes are converted on a full and permanent basis into common shares of the bank. 

Finally, CI Financial was also in the market with a $300 million 5 year debenture rated BBB(High) at GoC +178, also at the tight end of the range. 

Like the good people in debt capital markets like to say, when the ducks are quacking, feed them!

Other Stuff

In consumer product news, PepsiCo has struck a deal to buy South Africa’s Pioneer Food Group.  No word yet on whether popular Pioneer brand “Liqui-Fruit” juice will make its way to North American shelves, but we can only hope so. 

Also making news is the long awaited sequel to the 1986 hit Top Gun.  The first official trailer has dropped and Top Gun: Maverick will be in theaters next year.  I don’t know about you, but I’m ready to jump back into the Danger Zone!

It’s the 50th anniversary of the Apollo 11 moon landing tomorrow.  No doubt a major accomplishment but I won’t lie to you.  Writing this commentary has been one small step for man, but one giant leap for Treasury Guy.  It’s Friday, it’s hot and sunny, the Ducati is calling my name, and it’s definitely time to buzz the tower.  I feel the need…the need for speed!  

Have a great weekend,

Treasury Guy

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