Market Commentary: Rates, this week’s BoC meeting, data and more. Read about them here

  • Jason Ellis, Chief Operating Officer

Greetings Mortgage Market Participants,

Apologies for my recent lack of publication but I was in Iceland the last two Fridays and unable/unwilling to post.  It was a great trip but unfortunately I failed to master the language during my brief visit.  To the untrained eye, the written word in Iceland looks as though someone sneezed vowels onto to a page.  Anyway, the highlights included snorkeling in glacier water which is an absurd undertaking.  I’m only just starting to get some feeling back in my face (and other places).  My colleague Hilda, First National’s General Counsel, happened to be in Iceland with her family at the same time.  She enjoyed her visit to a Puffin sanctuary.  Personally, I enjoyed my Puffin with some fava beans and a nice Chianti. 


It’s been a turbulent couple of weeks in fixed income.  Using the 5 year Government of Canada bond yield as a barometer, we’ve climbed from a low of 1.13% on Wednesday August 15th to a high of 1.35% on Thursday August 22nd before falling all the way back down to 1.14% on Wednesday only to bounce back up to 1.34% today.  

But why you ask?  Indeed.  There is only one constant.  One universal.  It is the only real truth. Causality.  Action, reaction.  Cause and effect.   

I’m afraid I don’t have much of an answer.  Market volatility has been largely headline driven and that remains the biggest risk.  It’s the usual concerns of a US/China trade war, comments from the FED, Trump Tweets, economic data, and political unrest.  I know that sounds vague but it’s all I’ve got.  At least it’s better than “more sellers than buyers”. 

The volatility hasn’t been limited to the fixed income market.  The Chicago Board of Options Exchange Volatility Index (“VIX”) uses option prices to track volatility in the S&P 500.  The VIX spiked in August to its highest levels since January.  More telling though is the shape of the VIX futures curve.  One month contracts cost more than two month contracts, a rare condition known as ‘backwardation’ that has typically accompanied turbulence in equity markets and bearish tilt in sentiment.  In case you were wondering, the normal state of the futures curve is not known as ‘forwardation’.  It’s called ‘contango’.  Obviously. 


BOC Meeting

The Bank of Canada had a regularly scheduled policy meeting on Wednesday and left its overnight rate unchanged at 1.75% as expected.  The overall tone of the bank’s statement was probably less dovish than anticipated.  The BoC retained its view that the current degree of monetary policy stimulus is appropriate and has not tipped its hand at a possible cut in October.  Future policy is still data dependent and subject to external developments including escalating trade conflicts that are weighing on global economic momentum.  As of this morning, the implied probability of a cut at the October 30th meeting is about 20%.


Speaking of data, we had employment numbers in Canada and the US today.  In the US, August non-farm payrolls missed estimates with a 130,000 increase compared to 160,000 expected.  Commentators suggest that cracks are forming in the US labour market and a second consecutive cut by the Fed at the September 18th meeting is virtually assured.  (Warning: Fed Chairman Powell speaks on “Economic Outlook and Monetary Policy” at 12:30 EST today.  Could swing rates if he goes ‘off script’)

In Canada, the August net change in employment of 81,100 well exceeded the expected 20,000, though the increase was largely driven by part-time work.


Home Trust announced a roadshow for an inaugural near prime/alt-a RMBS transaction.  The roughly $500 million sequential pass through issue will feature an AAA rated note with 15% subordination.  No word yet on indicative spreads.  The issue marks a potentially important development in the diversification of near prime funding strategy for Home Trust.  The news closely follows Equitable Bank’s announcement last month that it is developing a covered bond program.  Currently, both lenders depend almost exclusively on CDIC insured deposits to fund their near prime mortgage programs.

Treasury Mailbag

Roman Boyer, Pet Stylist and Fence Painter asks “Is this a good time to borrow money?” 

Well, Roman, according to a report published by Bank of America you’ll be happy to hear that there hasn’t been a better time in 5,000 years to do it.  Interest rates today are, generally speaking, the lowest they’ve been since Stonehenge was under construction and the Pharaohs ruled Egypt.

I wish I could write more, but I need to get going.  I’m having an old friend for dinner.  Have a great weekend.

Treasury Guy