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Market Commentary: The changes in bond yields and new bond issuances

Aug 16, 2019
Capital Markets update
Andrew Masliwec, Analyst, Capital Markets

Greetings mortgage people,

Markets have taken a sharp turn lower these last couple weeks, so much so that even your local dog walker has probably taken notice. Where will they go from here? Well you’ll just have to read to find out….maybe.

Rates 

As always, it’s good to have a refresher on what bond yields have been doing the last couple weeks. Bond yields are lower, much lower. The 5 year Government of Canada bond is yielding 1.17% and the 10 year is yielding 1.13%. Yes, that’s correct: the 10 year is at a lower yield than the 5 year. Compared to a week ago, the 5 year is 9 bps lower and the 10 year is 14 bps lower. For an even more shocking comparison, a year ago the 5 year was 2.19% and the 10 year was 2.27%. How the mighty have fallen.

The credit curve also shifted lower this week. The 5 year CMB is yielding 1.49% and the 10 year CMB is yielding 1.54%. That’s the flattest the CMB curve has been in recent history. I’ll reiterate what the well informed, tennis-playing anonymous writer spoke about last week: The flatness of the yield curve has generated some exceptional demand for the 10-year mortgage bucket. With so much demand and little 10-year market supply, First National as an industry leader is now offering 15 and 20 year commercial products, lock in long term rates at historic lows.  Get ‘em while they’re hot! 

As mentioned earlier with the negative 5-10 GoC spread, a lot of the talk this week has centered on the inversion of the yield curve. Experts in various fields, most of them not in economics or yield curves have quipped: “the yield curve is inverted, a recession is looming!” Is a recession coming though? I have no idea. I am not a recession expert. So here’s a “meme” that sums up the collective knowledge on yield curve inversion and its effects:

 

Commentary - August 16

@arbitrage.andy

  

What I can speak about is that, yes it’s true, the Canadian yield curve is inverted. Currently, the 30 year GoC is trading at a lower yield than the 1 year GoC, meaning you earn a lower return for holding a bond for 30 years than you can holding for 1 year. The 1 year point doesn’t exactly hold that much weight in Canada though. However, the 2-30 spread does. Right now the 2-30 spread is exactly 1 basis point, with the 2 year yielding 1.325% and the 30 year yielding 1.335%. What happens when that goes negative or “inverts”? I don’t know, I couldn’t find another meme for that….. but here’s an interesting stat: according to Bloomberg, there is approximately $14 Trillion dollars of negative yield debt outstanding globally.

Bond Issuances

This week was as choppy as ever in the credit and equity markets, but regardless, there was a new issuance of 10 year CMB’s and with all things considered it went pretty well. The 10-year CMB was reopened at a size of $2.25 billion, which brings the total outstanding to 4.5 billion. The CMB priced at a spread of +41.5 bps over the 10 year GoC, which was 4.5bps tighter than the first opening and only +0.5bps wider than last August’s old 10-year opening. And oh boy, did the street need this issuance. With only 2.25 billion issued in the original security, this bond has been near impossible to borrow or settle in the bond market. That’s not fun as a net seller.

Monday we also had a real estate deal in the debt markets with Crombie REIT pricing a 7 year, BBB rated note. The deal was $200M in size with a spread of +247 over the interpolated 7-year curve. Compare this to last week’s RioCan REIT issuance of $500M, 5.5 year callable BBB note, which priced +143 vs the Canada 06/25 bond.  Finally, the real estate deals weren’t done with Allied REIT pricing $300M of a 10 year BBB bond on August 6th. Pricing came out to +215bps over the Canada curve. What do they know that you don’t? Well if the need to refinance and the investor base is there, with such low rates it’s a great time to be an issuer or mortgagor to get cheap additional funding!

So what caused all this chaos in the markets the last two weeks? A lot of things:

  • Trade tariffs being enacted on China, then taken back on some Christmas shopping goods
  • Argentinian elections stirred fears they may default on their sovereign debt
  • Hong Kong protests
  • Just generally, global tensions and risk-off mentality
  • McDonald’s changed their Big Mac

I can attest to the last point. McDonald’s did change the Big Mac. The top bun is 3mm smaller and the bottom bun is 3mm larger, with it being overall chewier.  A whole 10 more Milliliters of Mac Sauce was added and onions are now put on the patty while still on the grill. Market-moving stuff if you ask me.

The big question is: So how was it?

It was still better than Tim Hortons.

Until next time,

Andrew Masliwec

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