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Market commentary - September 9, 2016

Sep 9, 2016

Morning,

Market focus this morning was on the Canadian Employment data released at 8:30am.  The economy created 26,000 jobs (vs 14,000 expected) but the unemployment rate still ticked up to 7.0% (from 6.9%).  The composition of new jobs was favourable with a tilt toward full-time however, other details like hours worked fell and wage growth decelerated.  Overall, not a lot to get excited about.  Bond yields are a couple of basis points higher with 5 year trading around 0.69% and 10 year trading around 1.12%...virtually unchanged from a week ago.

In central bank news, the Bank of Canada met on Wednesday and held the overnight interest rate unchanged at 0.50% as was universally expected.  In the related comments though, the bank acknowledged slower export growth and an uncertain environment for business investment.  The bank also noted that the risks to inflation had tilted somewhat to the downside (aka: DOVISH).  Overall, the statement come off more dovish than expected resulting in a sharp move higher in USD/CAD and rates fell (bonds rallied) on the release.

Also this week, the European Central Bank (“ECB”) disappointed markets and kept its benchmark refinancing rate at 0% and did not change its trillion-euro bond buying plan.  Investors were hoping the central bank would extend its quantitative easing program. 

Speaking of quantitative easing, a report in the Wall Street Journal today noted that the Bank of Japan is currently buying more than $750 billion of government debt a year in an effort to spur inflation and growth.  At that rate, analysts say there could be a shortage of government debt within the next 18 months.  Somebody get me Japan’s phone number.  We’ve got lots of CMB and NHA MBS guaranteed by the government of Canada AND her Majesty the Queen at prices they won’t believe.  Order now and we’ll throw in a set of Ginsu Knives.  Shipping and handling not included.

Speaking of NHA MBS, Bank of America Merrill Lynch came to market yesterday with a $1.5 billion 5 year NHA MBS deal.  $500 was offered but demand allowed them to upsize to $750 at a spread of GoC+88 which represented about a 3 basis point new issue concession (“NIC”).   Bonds broke at +85 in secondary trading.  While we would characterize the deal as successful, it is worth noting that RBC issued a $1.75 billion 5 year deposit note on Wednesday at GoC+96.  It’s notable because the spreads between the MBS and the Deposit Note were only 10bps compared to the typical 20-25bps.  The take away is that investors are looking for liquidity over credit and are willing to compress spreads between deposit notes and MBS to get it.  Hopefully this spread compression with make the relative value in MBS too good to resist going forward.

In other securitization news, next week will bring the launch of the new December 2021 “5 year” Canada mortgage bond.  We’re also keeping our eyes open for a new CMBS transaction from RBC sometime this month.  Stay tuned for details.

Finally, its time again for the Toronto International Film Festival or “TIFF” as the horsey set say.  Second only to Cannes in terms of high-profile pics and stars, it has become one of the most prestigious events on the film industry social calendar.  All I know is that they closed down access to my preferred motorcycle parking location.  This aggression will not stand, man.  Treasury guy does not abide.  If it were up to me, they can go watch their 8-hour documentaries on Uzbekian Animal Husbandry somewhere else. 

Have a great weekend,

Treasury Guy…that or, uh, His Treasuriness, or uh, El Tresurino, if you’re not into the whole brevity thing.