Andrew Masliwec looks at this week’s rates, benchmark changes and economic news

  • Andrew Masliwec, Analyst, Capital Markets


I’ll cut right to the chase today on this early bond market close. I’ve got babies to kiss, family to see and 4 AM curling to watch.

Equity Markets and Canada Mortgage Bonds

After last week’s tumultuous movements in markets and the splendid commentary that followed, I am sure many of you are waiting to see what happened this week. Luckily for me, I had the Montreal office’s best following very closely and provided the following synopsis, “Last week the market took an L, but it looks like things have bounced back”. I think some things may have gotten lost in translation, but the point still stands. Sort of.

Almost two full weeks since the Dow’s huge fall last Monday, stocks this morning are coming off the best five-day rally since 2011. This is important. Confidence in equity markets typically spills over to the credit markets (bonds quoted with a spread) as they are more risky than government bonds. The index Jason quoted last week, the CDX North American Investment Grade Index, is 8 bps tighter than it was last Friday. This is good news for issuers of fixed income products, as debt is cheaper to raise.

Speaking of issuers, the 10-year Canada Mortgage Bond(CMB) was priced and issued this Wednesday by the Canada Housing Trust. Although a CMB is a secured debt instrument which has the full backing of the Canadian government, it is priced using a spread over GOC’s. I’m still not confident why that is. In the words of the late, great Michael Scott, “I understand nothing.” 

The new 2.65% coupon 10 year CMB was priced at a spread of +36 over GOC 10s.  This was the 2nd reopening for the 2028 maturity. This was 9.5bps tighter than the 2.35% coupon 2028 CMB. For a comparison, the old 10 year CMB (2027) was reopened at +48.5 (2nd time) and 44.5bps (3rd time) over the GoC 10s. That’s a lot of numbers, but what it means is, credit spreads are tighter due to improving market conditions, at least for this week.

Rates, Benchmark Changes and Economic News

Overall bond yields are mixed on a week which was thin on major economic news. The current 5 year bond is yielding 2.12% and the 10 year is yielding 2.32%. The 5 year is pretty much unchanged on the week while the 10-year is 6bps lower. When we quote the 5 year Government of Canada (GOC) we are now referencing a new maturity of 2023, as the benchmark for the 5 year bond has changed to the 1.75% 03/01/2023 bond. This attributed to the lack of movement in the 5-year GOC yields for all your borrowing quotes.

The major economic news on the week was from current-maybe-ex NAFTA partner, the United States, as their CPI YoY number on Wednesday came in at 2.1% vs the 1.9% expected. This shot up US treasury yields to a high of ~2.94% on the week. However, retail numbers in the US were actually very weak, which means that even though inflation is strong, real spending declined which shows that consumers are being pressured by price increases. I don’t want to hypothesize and Trump still isn’t responding to my tweets, but weak retail sales and high inflation isn’t a good mix.

On the Canadian front we had just two pieces of economic news. The first being Canadian home sales which plunged 14.5% in January. Toronto was down 27% which led the broad decline in sales activity, although benchmark prices were still up 0.3% MoM. The second piece was released today in December manufacturing sales which came in at -0.3% MoM vs the 0.3% expected. Overall, 2017 was a decent year with production volumes rising about 4%. Let’s hope 2018 is even better than decent.

Olympic Update

Finally the Olympics are on, I think, at some point in the middle of our night. Reading the headlines this morning it seems there was a bit of a curling controversy. Canadians are once again stirring up international drama with the Danish. The controversy focused on something to do with “burning” a rock after the “hog line” and whether said rock shall be replaced along with all other displaced rocks. I wish I knew what that means. What I do know, is that the City of Toronto is letting bars open early for morning Olympic hockey.

See you there.