First National Financial LP

Market Commentary: What has the last two weeks in the market been like? Find out here.

  • Oct 30, 2020
  • Neil Silverberg, Analyst, Capital Markets

Just as you thought politics has crept into every possible aspect of ours lives, we have all clearly forgotten about Halloween. In my neighbourhood, one side of my street has decided to go all in – tons of decorations and they will surely allow their kids trick or treat. The other side – not so much. My dilemma on the other hand is not as political, it simply boils down to whether I hand out the candy I bought, or just do my part helping our community by eating it all.

Speaking of tough dilemmas – there is only one thing scarier than Halloween. The realm of possibilities that could take place after next week’s election. With the week that lies ahead, I could sure use a short break from U.S. election talk. If you do however want to know more about the past week’s events and the volatility that we’ve seen, then you’ve come to the right place.

Rates and Curves Volatility!

The past two weeks in bonds, stocks, oil, gold, bitcoin and any other asset class you can think of can be summed up in one word: volatility. Good news for market makers, bad news for everyone else.  Here is a quick recap of what we’ve seen over the last month.

Yields on the 5-year GoC and 10-year GOC are currently 0.39% and 0.63% respectively. That is a decrease of 1.5 bps and 3.5 bps from Thursday, October 22nd.  The current 5-year CMB is yielding 0.65% and 10-year interpolated CMB is yielding 1.07%. From the same time last week, the 5-year remained flat and the 10-year decreased by 1.5 bps.  

As previously mentioned, volatility is the name of the game and credit spreads are making a case for first prize.

To start, on Oct 14th, 10-year spreads hit their lows at 32 basis points above the 10-year GoC benchmark which marks the lowest they have been over the last year. Suddenly, the BoC announces that it will stop buying CMB’s in the secondary market (they can still buy newly issued CMB’s) and just like that spreads moved swiftly up to 40 basis points above the 10-year benchmark.

As the dust settles, we are now back to a spread of about 38 basis points which is in line relative to recent history. Take that for what it’s worth given this period of high volatility and uncertainty.

Bank of Canada Rate Announcement

In its policy statement on Wednesday October 28th, the Bank of Canada left the overnight rate target unchanged at 0.25%. I will skip over the more nuanced part of the announcement however, you can find these details here.

The BoC announced it would gradually scale back its Canada bond purchases (otherwise known as QE) from $5 billion per week to $4 billion. In addition to this, the BoC decided to shift their purchases towards longer-term bonds. By moving further out on the curve, the BoC receives a larger impact per dollar spent even as it reduces the total bond purchase size.

The decision did not come as a complete surprise considering the fact that yields on the short end of the curve are practically pinned down and the BoC was having trouble finding enough bonds to buy. The initial reaction over the last few days, however, has still been noticeable with yields up about 7.5 bps on the 20 and 30-year bonds which currently now have a yield of 1.03 and 1.22 respectively.

A further reduction in QE with another shift out on the curve could be on the table in the near future. This, of course, is highly dependent on the economic severity of the second wave.

In case you missed it:

  • September unemployment fell from 10.2% to 9.0% beating expectations. Employment is now within 720,000 (-3.7%) of its pre-COVID levels in February. It should be noted, however, that low-wage workers (defined as those who earned less than $16.03 per hour) still make up the majority of the remaining 720,000, whereas the higher wage earners are back at 99.1% of February employment levels.
  • This morning, Canada announced a rise in GDP by 1.2% m/m for the month of August beating expectations by 0.3%. This is the fourth consecutive month where we have had positive GDP growth following the historic plunge earlier this year.
  • On Wednesday alone, the S&P 500 fell 3.5% and all but 15 companies finished in the red. Furthermore, WTI 1-month oil futures are now down to their lowest levels since the beginning of June.
  • Brookfield announced that they are buying the remaining 43% stake of Sagen that it does not currently own for $43.50/share for a total of about $1.6 Billion. Sagen, previously known to all of us as Genworth, is a private residential mortgage insurer.
  • CMHC announced new initiatives to support affordable housing in Canada including additional benefits to securitizers for pooling CMHC affordable deals. This is not only a great step towards providing more affordable housing incentives but is also a great opportunity for owners and developers to get involved. For more information on the affordable financing option, contact your First National sales rep today!

Thanks for reading and don’t forget to take advantage of the extra hour of sleep this weekend - lord knows we are going to need it.