First National Financial LP

Market Commentary: Rates, curves, the BoC announcement and more

  • Neil Silverberg, Senior Analyst, Capital Markets

The kids are back in school and Starbucks pumpkin spice lattes are back! Fall is here and we can turn our attention towards the upcoming 5-year CMB issuance. Exciting times for all!

What did you miss over the summer you ask? Well in case you were busy getting some much-needed rest & relaxation, here are some quick highlights:

To start, two billionaires raced to see who could get to space first in a mission that they say will be of vital importance for the future of humanity! Ticket sales for future passenger trips are nearing $100MM each so I think that speaks for itself.

The Chinese Communist Party hadn’t flexed their muscles in a while so it decided to crackdown on technology companies such as Tencent and Alibaba, which caused a massive selloff in their equity market.

On a more positive note and a major highlight of the summer, the Canadian women’s soccer team took home Gold at the Tokyo Olympics beating the U.S. in penalties. The Canadian women’s hockey team also won the world hockey championship last week beating the US 3-2 in OT. 

Looking ahead, it will be a busy fall and the post Labour Day rush is already here in full force. Here are your latest market related updates.  

Rates and Curves

As of Thursday’s close, the 5 and 10-year Government of Canada (“GoC”) bonds were trading at 0.79% and 1.17% respectively. Both of which were flat from the beginning of the month.

The 5-year Canada Mortgage Bond (“CMB”) also remained flat on the month, closing on Thursday at 1.03%. The 10-year CMB was down 3 basis points month-to-date and closed on Thursday at 1.62%. Credit spreads on the 5-year were unchanged while the 10-year spread narrowed from 42 basis points to 40 basis points since September first.

Although yields haven’t moved much this week, Investment Grade (“IG”) credit has been chugging along. From Tuesday to Thursday there were 5 deals announced in Canada for a total of $3.6 billion demonstrating the continuous investor demand for Canadian corporate credit. This is good news for bond market participants, especially with the upcoming 5-year CMB supply expected next week.  This demand for credit is apparent in the US as well with over $75 billion in IG bond issuance over the last three days alone.

Mark your calendars

September 20th is our Federal election. If you were lucky enough to miss the debate last night, some big-ticket policy items include climate change, childcare, affordability and further unemployment/covid benefits. The platforms are full of lofty promises about spending money and making it easier for first time homebuyers to purchase a home with few speaking on the supply side issues that Canadians have been facing.

Bank of Canada Rate Announcement

We didn’t learn much from the Bank of Canada rate announcement on Wednesday morning. The Bank of Canada left all policy variables unchanged as expected and left the pace of Government of Canada bond purchases at $2 Billion/week.

Tiff Macklem spoke on Thursday and for the first time released guidance on how the Bank of Canada plans to eventually reduce their monetary stimulus. Macklem said that when policy makers start paring back the stimulus, the first move will be to increase the central bank’s policy interest rate rather than reducing bond holdings.

Why is this important? As the bonds that the Bank of Canada already own mature, the principal will need to be re-invested. Therefore, bond purchases which are currently at $2 Billion/week will likely remain above $1 Billion/week threshold for the foreseeable future until the policy rate has moved up and the bank can safely deleverage their balance sheet. In other words, the final step in tapering from $1 Billion to $0 will be after the policy rate has been increased which is still not expected to occur until the second half of 2022.  

In case you missed it:

Canadian GDP disappointed last week with an annualized decline of 1.1% vs. the Bank of Canada’s estimate of +2.5%. The primary culprit of the unexpected decrease was surprise surprise… revisions. Stats Canada revised both April and May down from previous data releases primarily in the monthly measure of real GDP and exports. Governor Macklem dismissed the Banks forecast “miss” during his speech on Thursday and doubled down on the fact that poor second quarter growth was affected by disruptions to global supply chains, not a demand side problem.

The Canadian labour report for the month of August was announced this morning. The change in employment came in above expectations at 90.2k with 68.5k full time and 21.7k part-time. This was the third consecutive month with job increases. The unemployment rate fell to 7.1% from 7.5%, the lowest level since February 2020.

Lastly, next week, Canada Housing Trust (“CHT”) is expected to launch its regular quarterly 5-year Canada Mortgage Bond.  The deal size is expected to be in the range of $5 - $5.50 billion. The bond is expected to price next week in the area of the 5-year Government of Canada bond + 31 basis points.

Have a good weekend (and don’t forget to vote in the upcoming election!)