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Market Commentary - May 6, 2016

May 6, 2016

Good Morning Mortgage Enthusiasts,

It’s Friday and it’s finally motorcycle weather in Toronto.  How can I possibly be expected to handle work on a day like this?  Life moves pretty fast, if you don’t stop and look around once in a while you can miss it.  So let’s be brief.

Top news today was employment data.  Canadian net change in employment and US non-farm payrolls both came in a touch lower than expected but overall the details weren’t too bad.  At the margin, the reports are positive for fixed income.  Bonds prices are higher and yields are 2-3 basis points lower on the news.   

The rally in bonds (prices up/yields down) this week has now completely reversed the sell-off in April, which was the worst month for bond prices in a year.  Canada’s 5-year and 10-year yields have now fallen approximately 20 basis points this week to 0.69% and 1.32% respectively. 

Overnight index swaps (“OIS”)really demonstrate how market sentiment has changed.  Back in January, the implied probability of a rate cut in 2016 based on OIS prices was 82% with virtually no chance of a hike.  Toward the end of April, positive economic indicators and a 20% rally in crude oil had turned things around.  The probability of a rate cut had fallen from 82% to virtually 0% while the probability of a hike rose as high as 22%.  Over the course of this week the market has reversed course again.  As of this morning, the probability of a rate cut in 2016 is back to 23% while the probability of a hike has fallen back to less than 2%.   What can I tell you?  It’s a mixed up, muddled up, shook up world.

In Canada Mortgage Bond (“CMB”) news, the market is looking ahead to a new 10-year issue later this month.   The September 2026 maturity should launch during the week of May 16th.  The yield pick up to extend from December 2025 to September 2026 should be 9-10 basis points.  With the recent tightening moves in provincial spreads, CMB bonds look cheap.  Let’s hope investors see it that way too. 

Finally, some of you have asked how I write this incredible commentary every week (well, most weeks).  The answer is that “I’m very highly educated.  I know words.  I have the best words.”

Yes…we may export asbestos, but at least we don’t have ‘The Donald’.  #IAMCANADIAN

Have a great weekend, 

The artist formerly known as Treasury Guy
Jason Ellis, Managing Director, Capital Markets