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Market commentary - September 30, 2016

Sep 30, 2016

Good Morning Mortgage Enthusiasts.

Greetings.  The First National marketing team has tricked me into believing that some of you are actually reading this.  They also made several threats that I should probably report to the HR department.   Anyway, we’re back.  In my defense, the Treasury guy was in Algonquin on a canoe trip last Friday, and it was an epic weekend. 

Since it’s been a couple of weeks, let’s catch up on where interest rates are first.  5 year GoC bonds are trading around 0.56% this morning (0.62% 1 week ago and 0.73% 2 weeks ago).  10 year GoC bonds are trading around 0.94% this morning (1.04% 1 week ago and 1.19% 2 weeks ago).  All told, that’s a pretty decent rally in bonds the last couple of weeks.  (Remember…bond prices up, yields down). 

One contributing factor was the statement from the FED following their September 22nd meeting.  Rates were left unchanged as expected but the statement had more hawkish language.  A hawkish central bank is concerned with inflation, suggesting future policy will lean toward higher rates.  Despite the hawkish tone, the ‘Dot Plot’ actually shifted down and on average, 1 hike was removed from 2017.  The ‘Dot Plot’ shows projections of the 16 members of the FOMC (the rate-setting body of the Fed).  Each dot represents a member’s view on where the fed funds rate should be at various points in the future.  The next FOMC meeting is November 2nd and there is a 17% implied probability of a hike.  The pending presidential election will likely push any hike into December though where the probability is over 50%.  The next Bank of Canada meeting is October 19th.  The implied probability of a CUT, based on overnight index swaps, is 13%. 

Speaking of the Bank, Governor Poloz addressed the markets in a speech in Quebec last week (Sep 20).  His comments suggested that low rates are likely to be a reality for quite some time in Canada.  In fact, the title of his speech was “Living with lower for longer”.  Catchy.  With the economy facing headwinds, the governor highlighted the need for monetary policy to remain accommodative.

As an aside, since we’re talking about low rates, I’d like to clear up some confusion out there with respect to negative rates.  A few people have asked me about the CIBC Covered bond issue that was reported as being the first Canadian Bank issue sold with a negative yield.  What perhaps wasn’t made clear enough was that the bond was issued in Europe and once the debt is swapped back to C$, it comes out quite positive indeed.   Rates are low in Canada, but still positive, so no, the Treasury Guy is not going to start paying you to borrow money.  Sorry.

In securitization news, RBC issued REAL-T 2016-2 a couple weeks ago.  The $420 million CMBS transaction featured a $141 million 3.5yr AAA and a $219 million 7.0yr AAA tranche.  The deal was reportedly 2x oversubscribed.  Hooray.

I’m sure a lot of other stuff happened since I last wrote, but I’m spent, and I’m already looking forward to the weekend and a HUGE series between the Blue Jays and the Red Sox. 

Finally, we have to acknowledge the passing of Arnold “the King” Palmer who once said “the more I practice, the luckier I get”.  Wise.  Here’s a little known fact.  Arnie was the Twelfth son of the Lama and was also quoted as first having said “Gunga galunga…gunga, gunga-galunga”.  The King is dead.  Long live the King!

Treasury Guy
Jason Ellis, Managing Director, Capital Markets