First National Financial LP

Market Commentary: Rates up, CMB up? Part two

  • Paul Uffelmann, Vice President, Capital Markets
Yields on the 5-year and 10-year GoCs are hovering around 4.25% and 4%, respectively. Market expectations continue to reflect rates being higher for longer with one more increase in Q1 2024, if not earlier, priced in. As expected, the Bank of Canada held their target rate at 5.00% at their September 6th meeting. What was not expected was August YoY inflation coming in at 4.0% (the expectation was 3.8%), a sizable miss. The next inflation data release will be on October 17th and the Bank of Canada’s next rate decision is on October 25th.
Yesterday the Government of Canada announced an increase of the Canada Mortgage Bond (CMB) annual issuance limit from $40 billion to $60 billion, with the additional issuance being designated for multi-unit rental. This decision is independent of the ongoing CMB consolidation review, on which we should have clarity later this fall.
Importantly, the incremental amount of issuance is subject to market demand, meaning we cannot count on the full $20 billion right away. It is unclear how quickly issuance will increase and how spreads will react. There could be heightened volatility as market expectations continue to adjust. We know the market can absorb $40 billion of annual issuance at current spreads, and there could be room for a bit more, but it is unlikely that the market can absorb 50% more issuance without a significant repricing …unless the Government steps in to support the program. 

In my last note, I said “there is a glimmer of hope” that the Government would maintain the current market-based CMB program with the Government purchasing additional CMB issuance. While it remains far from a sure thing, this is looking like a more realistic possibility following the announcement. Either way, it is a positive development that will increase the funding available for multi-unit rental. 
Please reach out to your First National advisor to discuss this and other market developments.