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Market Commentary: What happened with rates, yield curves and new issues this week? Find out here.

  • Andrew Masliwec, Analyst, Capital Markets

Greetings,

It’s been a couple weeks since the last commentary and thankfully the world kept on turning. What happened? Not really a whole lot. A few bad costumes and maybe the impeachment of a sitting President. The markets seemed to move. 

In any case, I’ll try my best to recap the impacts on interest rates. After all, I have to. The Treasury Guy and I had a call about an agreement or a “quid pro quo” as they say – he tells me what to do and I get my agreed upon salary.

Rates, Yield Curves, New Issues

Canadian bond yields whipsawed throughout the week on the back of nothing substantive economic news wise. The current 5 year GOC is yielding 1.40% and the current 10 year is yielding 1.36%. Since the last commentary on September 13th, 5 year Government of Canada yields are actually lower by 10 bps. That’s still 25bps higher than a month ago.  Suffice to say, it’s been an active month in determining market level mortgage rates.

On the credit curve, CMB’s have reacted similarly with the 5 year CMB yielding 1.70% and the 10-year yielding 1.78%. The 5-10 spread has widened out from about a month ago when it was only 5bps. There is still a metric-ton of demand for 10 year product. Luckily for you, the borrower, First National has you covered for even 10, 15 or 20 year commercial mortgages! Talk to your favourite sales gal or guy today.

So how’s the yield curve look these days? Well, if you remember there was a lot of talk back when the yield curve inverted. If you also read the leading paragraph you probably noticed that the 10 year is yielding less than the 5 year. That’s inversion in my book. No news yet on signs of a recession either. However, what they don’t teach you in ECON 101 is that yield curves can sometimes be not only inverted, but can also look like they are modelled after Canada Wonderland’s ” Behemoth”. Don’t believe me? See Canada’s current yield curve below: 

Commentary - Sept 27

Source: Bloomberg Charts

It looks like a fun ride, but it’s unbeknownst to me where it takes our economy next.

Finally, the low rate environment and decent risk appetite made new issuances flush the last couple weeks. Equitable Bank came to market with $200 Million in deposit notes maturing September 26, 2022. The deal priced at a spread of +145 bps over the GOC curve and was well subscribed with over 30 buyers.  It’s always good to see fellow lenders issuing debt to get a sense of borrowing costs.

Merrill Lynch Canada or the soon to be called ‘Bank of America Securities’ issued a Jumbo NHA MBS deal this Tuesday. Merrill sold $750 Million of the $1.5 Billion pool at a spread of +47 bps over the GOC curve. The deal priced well with over 23 buyers, 15%-20% fills and the books were 2x covered. This is coming on the back of Home Trust’s market-leading RMBS deal, so it’s great for both borrowers (you) and lenders (us), that investor appetite is “50% off coupon at Mandarin Buffet” level for Mortgage-Backed securities.

Economic and Other News

We missed covering CPI on the 18th, but overall it didn’t shake any markets. The CPI or inflation metric for August came in at -0.1% vs the -0.2% as expected. That keeps the YoY CPI number at a solid 1.9%. Not much there for the Bank of Canada.  On the 20th, we had retail sales for July which came in lower than expected. The month-over-month number for July came in at 0.4% vs the expected 0.6%. The market shrugged off the outcome overall and all eyes are on GDP which comes out next Tuesday. The Bank of Canada is currently priced at around 19% for a cut before the end of 2019.

South of the border, the Fed did what was expected of them and cut their fed funds rate by 25bps. More interesting than that is what’s happening in the US repo markets. Repo markets, which are the basis of all short term funding for financial institutions, saw large spikes in funding costs the last couple weeks. Reaching a level of 10% for overnight funding at some points, the repo market south of the border has seen a major squeeze for a variety of reasons including: corporate tax day, smaller bank balance sheets and large Treasury bill settlements. Why am I talking about this? It’s a niche but important market and the backbone of the financial system, so it’s worth reading into if you’re interested.

Finally, in other niche news you probably didn’t know, a German court recently ruled that being hungover is an illness. The ruling came after a food product marketed as a “hangover cure” lost in court. In Germany, information about food products cannot ascribe properties preventing, healing or treating illnesses.  Unfortunately, when I tried using my new found illness to skip work this morning, the Treasury Guy had me writing this instead.  

Have a good weekend,

Andrew