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What’s happening with bond yields and CMBs? Find out here.

  • Andrew Masliwec, Analyst, Capital Markets

Greetings,

Happy Friday. I’m being told that my favourite team, marketing, is taking an extended vacation in the near future. So if you don’t hear from us, it’s not because we forgot about you, it’s just that no one else knows how to update our website. 

Bigly stuff happened all throughout the last week. Unfortunately, even with the days getting longer I have less and less time to get this commentary out. I mean, I would love to give you the Matthews contract breakdown from a tax perspective and the implications on future growth of the Maple Leafs organization, but we just don’t have enough time. I need to focus on the markets today.

Just know this: our office will have a great view of the parades – both for the Raptors and the Leafs.

“How low can we go?” has been the theme for a while on bond yields.  Currently, if my morning coffee is working, I’m seeing 5 year Canada’s trading at a yield of 1.79%. That’s down from a week ago (prices are up, duh) from 1.86%. Recall 3 months ago, when we were seeing the 5 year yield trade at 2.43%. Good time as ever to borrow over 5s.  The 10 year Canada faired similarly. 10 year yields are trading at about 1.88%, which is a 5-10 spread of 9bps. That’s not a lot and is wider than the past, but the new normal for a while now has been a flatter 5-10 curve. 10 year Canada’s were trading at 2.50% 3 months ago.

Next week is a big week for issuers of Canada Mortgage Bonds (yours truly). The upcoming CMB deal is seeing solid demand, I am being told, as current CMB spreads are looking favourable to other credit products like provincial spreads. The current 5 year CMB spread to Canada’s is +36bps while the 10 year CMB spread is +50bps.  As my boss always likes to say, “CMB’s are backed by the queen herself”, so any spread to Canada’s is a confusing prospect but here we are. Corporate spreads in general are 2-4 bps wider overnight and over the past week as trade war and global tensions are still front of mind.

An interesting note on real estate firms from our friends at TD, where REITs have been moving away from the primary deal space and into non-bond real estate financing. Yesterday was another example where RioCan announced a closing and an extension of a non-revolving unsecured credit facility. Interestingly enough, there has been around $1.7 Billion in term-loan financing for real estate firms in the last few months, which means $1.7 Billion in bonds won’t be traded in the secondary market.  That means I also won’t be able to look up those additional REIT corporate spreads for the commercial guys when they need fancy charts. I don’t mind, but it’s a change in market preference worth noting.

November GDP came and went last week. It was bang on with consensus coming in at -0.1% month over month. That brings the year over year number to 1.7%. There wasn’t much in the way of surprises as manufacturing, wholesale and retail were all down matching some economists’ predictions. So much for Canadian Black Friday and buying early Christmas gifts. One of the biggest causes of the decline in GDP came through the Canada Post strike, which dragged down transportation/warehousing -0.5%.

Carolyn Wilkins of the Bank of Canada fame spoke last week as well. Of importance Mrs. Wilkins mentioned that wage growth was weaker than expected, even with the current tight job market. She also reiterated the few things the Bank of Canada is monitoring: wages, oil prices, housing and global trade. If you are curious about what will happen with interest rates going forward, it’ll probably be a good idea to keep those things in mind as we go forward. Mrs. Wilkins also mentioned the rate of natural unemployment to be between 5.5%-6.5%.

Which is a perfect segue into today’s economic news. Today brought: unemployment, jobs and wage numbers. Jobs were strong with a headline gain of +66.9k jobs, mostly in services. The job number was also equally split between full-time and part-time work which is pretty good. However wages, a BoC favourite, only slightly crept up. Average hourly earnings for workers only grew to 1.8% from 1.5% in December. The unemployment rate was within the BoC’s “natural rate”, coming in 0.1% higher than expected at 5.8%. All-in-all, it was a solid labour market release but the market brushed it off, mostly. There’s only a 33% chance of a rate hike by December, 2019.

An important deadline also came and went today where the USA and China won’t reach an agreement on trade and tariffs. That’s the forefront of the market’s mind, but you’ll probably hear the same time as I do on the outcome. In my opinion, all is fair in love and war, and I’m still figuring out if Xi Jinping is a lover or a fighter.  Let me know if you have any further research on the matter.

Finally, I don’t often give predictions since I don’t like to be proven wrong, but I’ll go out on a limb and say there’s no way “This is America” doesn’t win record of the year at the Grammy’s this weekend. It’s sung by Lando Calrissian after all.

Bon Voyage,

Andrew