First National Financial LP

Market Commentary: Rates up. CMB up?

  • First National Financial LP

Rates continue their steady march higher. The yield on the 5-year GoC is currently above 4%, an increase of almost 1% over the past 3 months. The yield on the 10-year GOC has also been rising and, with a sharp increase this week, is now above 3.7%.

While recent inflation data in Canada and the US have come in slightly better than expected, central bankers have made it clear that they think that getting down to their 2% target will require rates to remain at their current level, if not slightly higher, for quite some time. The market appears to believe in their resolve with no sign of cuts priced in until early/mid 2024. 

Since the BoC moved its target rate up to 5% on July 12th, data have been roughly in line with expectations. The market is currently expecting the BoC to hold rates steady at their next rate decision on September 6th with a greater likelihood of an increase in October. They will have plenty of additional information to help inform their decisions with the following key data releases: unemployment on August 4th, CPI on August 15th, and GDP on September 1st. 

In the US, the current market expectations are that the Fed is finished with rate hikes and will remain at 5.5% into early 2024. 

In other news, it is looking like the August Canada Mortgage Bond (CMB) issuance will be entirely backed by affordability-linked mortgage-backed securities. This will be a first and highlights a huge success for Canada Mortgage and Housing Corporation (CMHC) whose incentives have directly resulted in increasing the construction of new purpose-built affordable rentals across Canada. This comes as the Federal Government recently concluded its formal consultation process on the potential consolidation of the CMB into its regular GoC borrowing program. We will learn more about their plans in the fall and, importantly, no changes to the program will take effect until April 1, 2024 or later. 

And now a bit of a tangent related to CMB changes…purpose-built rental, the majority of which is funded through multi-family mortgages insured by CMHC and, ultimately, CMB issuance, is an important part of the solution to Canada’s housing affordability crisis. A proposal made by the Mortgage-Backed Securities Issuer Association, an industry group, and various market participants, if adopted, would build on CMHC’s success by expanding the CMB. The idea is pretty straight-forward, keep the existing market-based CMB program but increase total issuance with the Government purchasing only the incremental amount. The Government would earn additional upfront fees and net interest income (CMB spread over GoC) that could be directed towards funding affordable housing. Further, CMHC could restrict the availability of the additional issuance to 10-year multi-family pools, encouraging development of additional purpose-built rental stock. For example, increasing CMB issuance by 50% would result in ~$900 million of revenues for the Government while simultaneously funding $20 billion of additional purpose-built rentals.

Maintaining the existing structure and market issuance would also help ensure a stable funding market, essential for creating new housing supply, in addition to retaining the broader benefits of the program’s diversified investor base.

Is this likely to happen? Unfortunately, probably not. But, with increasing pressure on the Government to improve housing affordability, I think there is a glimmer of hope that they will view this as an opportunity to meaningfully increase housing supply with a slight pivot from the original consolidation plan to a fairly easily implemented change that builds on an existing, proven program.  

Your First National advisor is ready to help you navigate through your options.