OK. Before we start, I have three things to say. First, I don’t know how to put this, but, I’m kind of a big deal. People know me. I’m very important. I have many leather bound books and my office smells of rich mahogany. Second, if you haven’t seen Anchorman at least three times, you may as well just stop reading this right now. Third, the following is based on actual events. Only the names, locations and events have been changed.
Good Morning, and welcome to a world where the United Kingdom is no longer playing nicely with the other kids in the Euro sandbox.
It’s been quite the ride for yields over the last week and a half. Our story starts last week on June 15th. Government bonds yields, which had been falling, fell further (prices up, yields down) with rates touching the lowest levels seen since February as the Federal Reserve left interest rates unchanged and signaled a more gradual hiking path than previously projected. The accompanying FOMC statement was generally interpreted as “dovish” meaning the Fed does not believe that the inflation rate is high enough to warrant concern. At least I think so. Scholars maintain the translation of “dovish” was lost hundreds of years ago.
Fed Chair Janet Yellen also made a point of mentioning that the U.K.’s Brexit referendum was a factor in the decision to hold interest rates steady. In fact, government bond yields globally had been rallying as concern about slowing economic growth and the potential U.K. exit from the European Union fueled demand for ‘safe haven assets’. More than $8 trillion in sovereign debt worldwide is now yielding LESS THAN ZERO. It makes Greek bonds look like a bargain at 7.50%! Note: Contents are provided for general information purposes only and do not constitute an offer to sell or a solicitation of an offer to buy any Security in any jurisdiction…but if you want some Greek bonds, I know a guy…just sayin’.
ANYWAY, by the end of the day last Wednesday, 5 year GoC bonds were at 0.53%, 10 year GoC bonds were at 1.08% and the CDX Investment Grade spread index was at a 3-month high of 87bps.
In the days that followed, the apparent risk of a Brexit fell, the risk tone turned positive and equities and sovereign bond yields moved higher in response. Note: Investors that are less afraid and/or uncertain will sell safe haven assets like government bonds to move down the credit ladder into lower rated assets or down the capital structure from debt to equity. Sovereign bond prices fall (yields up), credit spreads narrow, and stocks rally.
By the time we went home last night, 5 year GoC bonds had climbed to 0.74%, 10 year GoC bonds had climbed to 1.29% (both 21bps higher since the FED), and the CDX IG spread had fallen to 77bps (10bps tighter).
Overnight however, the U.K. narrowly voted to leave the EU and everything we had accomplished over the previous week was reversed. The market is still evolving but GoC yields were 18-20bps lower at the open, CDX IG spreads are 10-12 bps wider, and Senior Canadian Bank deposit notes are 8-10bps wider. Even high grade credits like Provincials and CMB’s are 3-5bps wider. I don’t even want to talk about the stock market. (Note: the move in yields has moderated since the open. Rates are now ‘only’ 10bps lower than last night).
I truly don’t know where we go from here but the impacts will be rippling through the markets for the foreseeable future as the U.K. begins the multi-year effort to extract itself from the EU, affecting everything from immigration to trade in not just Europe but throughout the world.
There’s only one thing left to do. Pour yourself a drink and get your weekend started. It will make you feel better. They’ve done studies, you know. 60% of the time, it works every time! As for me, I love Scotch. Scotchy, scotch, scotch. Here it goes down, down into my belly.
You stay classy mortgage people,
I’m Treasury Guy?
Jason Ellis, Managing Director of Capital Markets