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Market commentary - May 20, 2016

May 20, 2016

I’m back. I appreciate that the frequency of my posts have become somewhat erratic but last Friday was Friday the 13th and that required a pilgrimage to Port Dover.  For those of you unfamiliar with this ritual, every Friday the 13th motorcyclists descend on Port Dover in a frenzy of Harley’s, beards, and leather tassels.  The Treasury Guy was waaay out of his element.  Clean shaven MBA types riding Ducatis are not the target audience.  Needless to say, I made it out alive and I’m happy to report this week’s events to you now.

Canada Housing Trust issued two new bonds on Wednesday.  A ’10-year’ 1.90% September 2026 and a September 2021 FRN.  Both bonds were very well subscribed and CHT issued larger than usual amounts.  $2.25 billion and $3.25 billion respectively (compared to $2.0 billion and $2.25 billion last quarter).  Both were also issued with spreads 0.5bps tighter than indicated at launch the previous day.  Overall, a very positive outcome.

Later on Wednesday, the FOMC minutes from last month’s meeting were released.  Overall they suggest that the Fed may be trending toward a more hawkish disposition (more likely to increase rates).  Bonds sold off in response and yields ended the day about 5-6 basis points higher.

Meanwhile, the Bank of Canada is expected to take a more dovish tone in its May policy statement, partly due to reduced oil production related to the fires in Alberta.  Nonetheless, most economists still agree that the bank will not cut interest rates again.  In fact, the next move by the bank isn’t expected until the second half of next year when it is expected increase rates to 0.75%.  In the near term, the BoC meets on Wednesday next week and is universally expected to leave rates unchanged at 0.50%.

In up to the minute news, Canadian Retail Sales for March were weaker than consensus this morning and should weigh on Q1 GDP.  Year over year CPI came in at 2.2%, higher than the 2.0% expected.  The two data points probably cancel each other out with softer retail sales offset by firmer prices.  Markets haven’t changed much on the news.

I should also mention that on May 11th, RBC’s CMBS vehicle, Real Estate Asset Liquidity Trust (REAL-T) priced a $401 million transaction backed by a portfolio of 55 commercial mortgage loans on 91 properties.  The transaction is the first in the CMBS space since last summer and was met by strong investor demand in Canada and the US. 

In completely unrelated news, former WWE wrestler Shawn “The Heartbreak Kid” Michaels has recently become a Pittsburgh Penguin fan but admits to not knowing the finer points of hockey.  To help him out, goaltender Denis Lemieux offered the following explanation of high sticking: “You know, you don’t do that.  Against the rules.  You do that, you go to the box, you know.  Two minutes by yourself, you know, and you feel shame, you know.  And then you get free”.   Next week, Denis explains mortgage convexity and hedging with swaptions.

Don’t forget…it’s an early close in the bond market today.  Traders need to get to Muskoka, so lock those rates early!


Treasury Guy

Jason Ellis, Managing Director of Capital Markets