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Market Commentary – January 22, 2016

Jan 22, 2016

Greetings,

The big news this week was the decision by the Bank of Canada to hold its benchmark rate unchanged at 0.50% on Wednesday.  The odds of a rate cut leading into the meeting were just over 50%.  One popular view is that the Bank sees the risks of further currency weakness and increased household borrowing as outweighing the benefits from a more accommodative policy.  The next meeting is March 9th and the implied probability of a cut is around 16%.

he Bank also released its quarterly Monetary Policy Report on Wednesday.  The 2016 GDP growth forecast was reduced from 2.0% to 1.4%, largely due to the precipitous decline in commodity prices (oil actually dipped below $27 this week).  That kind of adjustment to growth might normally have led to a cut in interest rates but the Bank noted the pending impact of fiscal stimulus (subject to federal budget details…all hail Trudeau) and the accelerated depreciation of the Canadian dollar in recent weeks.  In summary, the stimulus is in the pipeline.

In the minutes leading up the Bank’s announcement, the 5yr GoC benchmark (0.75% March 2021) yield was down 5bps on the day and setting a new low at 0.52%.  After the announcement, bonds sold off and yields jumped 10bps to 0.62% (remember…prices down/yields up).  Selling continued on Thursday and Friday morning.  5yr yields are now at 0.77% or 25bps higher since Wednesday morning. 

Despite the BoC meeting, the most remarkable thing that happened on Wednesday (at least for the Treasury Guy) was the NHA MBS issued by Bank of America Merrill Lynch (“BAML”) into one of the most hostile trading days seen in a long time.  As global markets melted down and credit spreads, including Provincials, were gapping wider, BAML had the audacity to launch at $475 million 5yr deal.  Remarkably, the issue was well received and even oversubscribed.  Inconceivable! 

Before we wrap up, let’s look back to where the market was one year ago, just after the BoC made its surprise 25bp cut on January 21 2015 and check the highs and lows along the way:

 

1/22/2016

High Yield

Low Yield

1/22/2016

5yr GoC

0.85%

1.13%

0.52%

0.76%

10yr GoC

1.42%

1.90%

1.15%

1.32%

Oil

$46.31

$61.43

$26.55

$31.08

5yr Bank Deposit Note Spreads

100

145

90

145

Finally, an important reminder that Monday is Robbie Burns day.  The day will be celebrated all over the world with Burns Suppers featuring the famous Haggis with Taters and Neeps.  Yum.  Remember, if it isn’t’ Scottish, it’s CRAP!

Lang may yer lum reek,

Jason Ellis
Managing Director, Capital Markets