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Rate update, equity market overview and mortgage securitization

  • Jason Ellis, Managing Director, Capital Markets

Good Morning Canadian Mortgage and TIFF enthusiasts.  You’ve come to the right place for up to minute market commentary and the occasional movie quote.  In truth, the market information tends to be largely skewed toward slightly dated facts without much insight, but to be fair, I think most of you are only reading this for the hidden movie quotes.  ANYWAY, I know I haven’t written for a while (again), but what’s important is that you understand something right off the top.  It’s not that I’m lazy; it’s that I just don’t care. 

Bonds yields are opening 3-4 basis points higher this morning.  The 5yr GoC benchmark Sep 2022’s are trading around 1.81%.  That’s up 10 basis points for the week and 25 basis points since the Bank of Canada hiked its overnight rate last Wednesday.  The 10yr GoC benchmark June 2027’s are trading around 2.09%.  That’s also up 10 basis points for the week and 25 basis points since the BoC rate change.

With the 0.25% hike last week, the bank of Canada has now taken back both of the rate cuts made during the 2015 oil shock, returning the BoC benchmark rate to 1.00%.  It’s interesting to note that oil is trading around $50 today which is about the same price is it was trading at when the BoC cut rates for a second time in July 2015. It’s not that oil prices have really bounced back; it’s just that the ‘shock’ has worn off.

The bank’s next policy setting meeting is scheduled for October 25th and the implied probability of another hike stands at around 50%.  In fact, there is a 24% probability that the bank will hike twice more this year (October and December).  That would take the overnight rate to 1.50% and the Prime rate to 3.70%.  That would translate into about a 10% increase to the typical monthly payment for borrowers with adjustable rate mortgages since the start of the year.  Better start putting those steak sandwiches on the Underhill’s account.

Next week features the next FOMC rate decision.  Based on the prevailing Fed Fund futures, the meeting should be a non-event.   No change expected. 

Mortgage Securitization
Canada Housing Trust re-opened the old 2.40% December 2022 bond yesterday with a $5.250 billion issue priced at GoC’s +39.  The bond was originally issued in 2012 as a 10 year deal.  Canada Housing Trust decided to take advantage of the fact that 5 year CMB yields today are about the same as 10 year CMB yields were 5 years ago. 

Also this week, Merrill Lynch Canada issued a new $1 billion 5 year NHA MBS ‘Jumbo’.   The deal was launched at GoC +58 (+ or – 1bp) and strong demand allowed the deal to price at the tighter end of the range at +57.  That represents the lowest new issue spread in over two years and compares quite well to spreads in excess of +100 as recently as November 2015.

North Korea
The DPRK launched another missile…this time right over the northern tip of Japan.  Markets have largely shrugged off the event but the United Nations did issue the following statement:  “The World minds.  This will not stand, you know, this aggression will not stand man”.  As of this moment, North Korea has been placed on double secret probation. 

Equity Markets
We don’t talk about the stock market much, but it’s worth noting that the Dow Jones Industrial Average had a record closing yesterday at 22,203.  That’s up 12.3% this year and 323% since March 2009 when it hit rock bottom during the liquidity crisis. That’s an impressive run, but less so when compared to mighty First National.  FN is up 488% since March 2009, or 24% annually.  Not too shabby.  The TSX as a whole is up 157% (11.7% annually) over the same horizon. 

That’s all for now.  I’ve got to get going…I promised Angelina I’d take the kids to Wonderland today and I’ve still got stack of TPS reports with no cover sheets to get through and a Fetzer valve that needs some 3-in-1 oil and some gauze pads.  No time to waste.

Remember…fat, drunk and stupid is no way to go through life, but it’s OK on weekends.  My advice to you is to start drinking heavily.


Treasury Guy
Jason Ellis, Managing Director, Capital Markets