First National Financial LP

Mitigate rising bond yields with First National's hedging program

  • Neil Silverberg, Senior Analyst, Capital Markets

There were some significant milestones that took place this week. The 10-year bond hit 1.48 for the first time since Jan 2020, the Canadian dollar hit a three year high at $0.80/USD and a digital Lebron James trading card sold for $71,000. Yes, you read that right – it is a limited-edition virtual card that captures an individual NBA highlight.  It took me some time to wrap my head around it too and to tell you the truth I am still unsure about the idea. There is just something about unpackaging a card set and chipping your tooth on an expired piece of gum from the 60’s that just can’t be replaced. Anyway, I just hope my 1919 Honus Wagner doesn’t lose its value from this new digital rival. 

Rates and Curves

The last time we saw a change in yields this quickly was almost 1 year ago to the day in March 2020. Only this time, it’s in the opposite direction. The on-going fixed income selloff has sent yields sky rocketing! Before we quickly dive into some of the factors driving this dramatic and rapid change in yields here is where we currently stand over the last 30, 60 and 90 days.

    February 26,
February 1, 2021  January 4, 2021 December 1, 2020 
GOC Yields  5-year  0.96  0.42  0.39  0.47
 10-year  1.44  0.88  0.68  0.74
 30-year  1.89  1.47  1.23  1.24
CMB Yields  5-year  1.28  0.70  0.69  0.75
 10-year  1.81  1.21  0.97  1.03
  1. The first factor driving yields higher continues to be the optimistic growth story on the back of the successful vaccine rollout and a new stimulus bill in the US. Although Canada is a step or two (or ten) behind, the US is providing a huge tailwind for our own respective growth story.

  2. The recent momentum that we saw specifically in the three to five-year bucket yesterday (an increase of 20 basis points in 1-day!) could also be a clue that the market is trying to call the Fed’s bluff and are convinced that the fed cannot hold rates at these low levels for as long as they had hoped. In other words, the market is trying to pull the expected 2023 rate hike forward. It is expected that once the Fed moves rates, the BoC will not be too far behind. This is important because it will likely speed up the tapering response by both the Fed and BoC as they continue to reduce their bond purchases and move out further along the curve. This will help keep a lid on longer term yields in the short run until they are prepared to make an adjustment in their short-term rates.

  3. Another factor contributing to the rise in yields – more specifically the increase in credit spreads is a result of the larger Canada Housing Trust (“CHT”) bond issuance that took place last week. CHT issued its regular quarterly 10-year Canada Mortgage Bond with a total deal size of $4 billion. Typically, the size of the deal is closer to $3.0 or 3.5 billion. Unfortunately, the CMB was not as well received as it has been over the last few issuances with the deal initially priced at 31 basis points over the 10-year GoC benchmark and trading as wide as 37 basis points. This is in part due to supply outweighing demand.

What does this mean for you?

For real-estate investors, the precipitous move in rates could be seen as concerning but with the flexibility of First National’s early rate lock program you can mitigate your risks accordingly. To find out more information about this program contact your sales advisor today.

Thanks for reading and have a good weekend.