First National Financial LP

Market Commentary: How have rates changed this month? Find out here.

  • Neil Silverberg, Analyst, Capital Markets


*Record Scratch* *Freeze Frame*

I know what you’re thinking right now - you must be thinking who is this new Treasury Guy and where is Jason or Andrew to start us off with their classic wit and charm?

Well, let me tell you, I’m thinking the same thing, but rest assured, what I lack in wit and charm, I make up for in my analysis and more importantly, getting straight to the point – so let’s jump in because we have a lot to cover.

Rates and Curves

Yields on both the Government of Canada bonds and Canada Mortgage Bonds were up from February 7th to February 14th and then gave it all back over the last week. The current 5 YR GoC is yielding 1.29% and the 10 YR GoC is yielding 1.27%. That is a decrease of 8bps and 10bps respectively from last Friday, February 14th.

The current 5 YR CMB is yielding 1.60% and it was around 1.68% last Friday. The 10 YR CMB is yielding 1.63% and last week was 1.70%.

With Canada’s 30-year government bond currently yielding 1.367%, four companies within the past two weeks have sold debt coming due in 2050 or later. Issuers are eager to lock in cheap funding for 30+ years and as investors continually search for yield, they are happy to support the long-term issuance.

In real estate related issuance, Choice Properties REIT issued $500MM of senior unsecured debentures in two series. The first being $400MM that bear an interest rate of 2.981% (10 YR GOC + 165) and mature in 2030, and the second being $100MM that bear an interest rate of 3.827% (30 YR GOC + 237) and mature in 2050.

Department of Finance announce changes to qualifying rate

The Department of Finance announced on February 18th that it will be making changes to the mortgage stress test related to B20. As a refresher, the current qualifying rate system for insured borrowers is to qualify at the greater of the Borrower’s contract rate or the benchmark rate. Uninsured mortgages will qualify at the greater of the borrower’s contract rate + 2% or the benchmark rate.

For insured mortgages only, the government will now replace the Bank of Canada 5 YR Benchmark Posted Rate with a median 5 YR fixed insurance mortgage rate as calculated from federally-backed mortgage insurance applications. 

The latest conventional 5-year posted rate currently stands at 5.19% (for the record, this rate has not budged since July 22, 2019 even as mortgage rates from that time have declined significantly). Compare this to the weekly median 5-year fixed insured mortgage rate based on mortgage insurance applications which currently stands at 2.83% (+ the 200 basis point buffer) gives you a difference of 36 bps.

In a decision that could potentially have larger impacts on the mortgage market, OSFI also announced it is considering extending this logic to uninsured mortgages, which makes up a larger chunk of the overall mortgage market.

So, what does this mean? The lower qualifying rate should move some borrowers back to regulated mortgage lenders who were currently with private unregulated lenders. The change should also provide the borrower with additional buying power and improve the chances that a borrower qualifies for a mortgage…. all just in time for the hottest Toronto real-estate market seen since 2017!

(Not so) Quick Hits

Surprise! Starlight made yet another acquisition to further consolidate the multifamily real estate market. In case you missed this news yesterday, Starlight Investments and KingSett Capital are set to acquire Northview Apartment REIT in a transaction valued at approximately $4.8 billion or $36.25 per trust unit (11.5% premium to Wednesday’s closing price of $32.50). Northview has 60 days to shop around for a better offer.

Earlier in February, RBC launched a $494MM CMBS deal consisting of Canadian commercial mortgages diversified across seven provinces. Asset types primarily include shopping centers, office, retirement, multifamily and industrial. Class A of the deal totaling $251MM was priced at GOC+104.

TDSI (a unit of TD Bank) has moved ahead with a $688MM RMBS deal of which $450MM has been offered to institutional investors on the open market. Pricing of the deal took place yesterday and resulted in a price of 55 bps over the interpolated GoC Curve. A good sign for the overall RMBS market.

Economists are beginning to consider revising their 1Q GDP forecasts due to Canada’s ongoing protests that has debilitated Canada’s rail network. The economic impact from the disruption is likely to be more significant than the November rail strike.  Temporary layoffs have already begun and economists are waiting to see if manufacturing/production will be impacted.

To break this down: if there is no transportation available, manufactured products will go directly into inventory. Once the rail system is back up and running, manufacturing may slow down because of the excess supply available.

Lastly, in other exciting news, First National sold a $147MM 10-year NHA MBS this week through a syndicate of dealers. This was the first syndicated multi-family pool offering in the Canadian Market. The deal follows a national call where First National stated their intentions to continue issuing 10 to 20-year MBS so make sure you get those 20-year mortgage applications in asap! 

Thanks for reading & have a good weekend,

Neil Silverberg