What were the changes with the bond yields this week? Find out here.

  • Andrew Masliwec, Analyst, Capital Markets


This morning I am writing from the barren and deserted office landscape formerly known as the financial district or downtown Toronto. The bustling cosmopolitan metropolis is now more akin to a scene out of your favourite post-apocalyptic movie.  If you live west, north, south or east of Toronto – you probably don’t know the feeling. You see, last night Toronto experienced an event that happens year after year: a snowfall. Much like clockwork, the first snowfall also brings out the worst in drivers, commuters and transit systems, which grinds the city to a halt. But just so you know, I braved the elements and the 5 centimeter snowfall to bring you, our loyal readers, this week’s commentary. Hopefully my sacrifices don’t go unnoticed.

Yields are Different than Last Week

Yes, yields are different than last week. In fact, for all the borrowers out there you could use First National’s “early lock-in” feature to lock-in a commercial mortgage rate that would be similar to a fixed mortgage rate 6 months ago.  If you have been paying attention (there may be a quiz), that means bond yields are back to where they were before the last 2 rate hikes.

The 5-year Government of Canada bond is yielding 2.30% which is the same as a sunny and warm 6 months ago. This is also a 13 bp decline in yields from last week. The Canada Mortgage Bonds are trading similarly. The 5 year is yielding 2.58% while the 10 year is yielding 2.76%, which is a week-over-week decline in yields by 11 bps and 10 bps respectively. However, further out the yield curve swap levels have been increasing with the 10 year, pay-fixed receive-float, swap currently at 2015 highs and the 30 year swap at a decade long high. Clearly, the market is pricing higher interest rates in our future…even with the current decrease in rates. The current implied probabilities for a rate hike are showing a 31% in December and a 67% in January.

It would be proactive to inquire about locking-in that First National rate today!

New Issues

Of all the new securities issued this week in the market, in my unbiased opinion, only two are worth mentioning:

The first being First National coming to market with a syndicated NHA MBS deal on Wednesday. As one banker mentioned, “the mighty First National was back doing God’s work in the NHA MBS market”. You are welcome world but hold your applause, our team is only doing our job.  FN sold $600 Million at the market level where MBS was trading at, +48bp over GoC’s.  Not too shabby.

The second being a reopening of the 10 year CMB. The $2.25 Billion deal came in at +39 BPs over GoCs. The first opening of this bond came in at +41bps over the 10 year GoC, so it reopened at 2bps tighter.

All in all, it was a good Wednesday for mortgage issuers and banks.

News also Happened?

Oil has been making headlines recently. The price of WTI has crashed over the last month to year lows of $55 a barrel.  For context, we were seeing oil prices of about $70 a barrel in October for “the good stuff”, West Texas Intermediate. Most of the WTI oil price decrease has been attributed to oversupply. Canada uses Western Canada Select (WCS) out of Alberta, mainly. WCS trades at a discount to WTI and that discount is at 2015 levels. In fact, the last time WCS was trading so cheaply in the market, 2015/2016, the Bank of Canada was actually cutting interest rates to bolster the economy. This discount may end up causing problems, especially since pipeline issues have been reignited over Keystone XL with the Democrats controlling the House.  With uneasiness in the oil markets, safe haven assets like bonds have are being bid up, leaving rates lower. We’ll have to wait and see what the Bank of Canada says and does on December 5th .

The Ontario government also released their fall economic statement which held some important implications for hockey, beer and real estate. Well, those three are dear to my heart. The Ontario government was cutting ‘red tape’ that would include OHL players in the Employee Standards Act, effectively saying they aren’t employees and don’t need to be paid minimum wage, in order to remain competitive with the WHL and QMJHL.  Our beer and liquor distributors will now also be able to operate from 9am-11pm, 7 days a week, which may also include some beer and wine sales in convenience stores. No complaints here. On housing, the PC’s announced they would remove rent control restrictions on new builds. I’m not a real estate expert, but speaking with the creator of the Commercial Real Estate Podcast, Adam Powadiuk, the implications of this is great for developers. I am sure the government is hoping the same thing, where the thinking is increased rents will spur development to fix our record high housing prices and undersupply.

Finally, does anyone have the number for a good military service? Preferably Canadian? I’m trapped inside the building due to this white cold stuff on the ground and need someone to shovel.

Have a good weekend,