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Market commentary

Dec 9, 2016

Good morning,

Welcome to what is quickly becoming more of a tri-weekly struggle to come up with new and interesting material.  In my defense, I was out of town last week visiting my younger, cooler, taller brother, also known as “Heli-Ski Pilot Guy”.  Yup.  Treasury Guy got the short straw on the career awesomeness trade.  Anyway…

National Bank closes broker division

Last week National Bank announced its intention to withdraw from the residential mortgage broker channel, leaving Scotiabank and TD as the last of the Big 6 banks lending directly through brokers.  National will, however, continue to generate mortgages indirectly through the channel, announcing an intention to purchase mortgages originated by non-bank lenders.  Anyone have their number?  Treasury Guy should probably give them a call.

Jobs

The Canadian unemployment rate fell from 7.0% to 6.8% in November.   It was the first decline in 5 months.  Unfortunately, the change was largely driven by people dropping out of the labour force and companies adding part time workers, so not exactly a big win.  Unemployment in Alberta surged to its highest level in 20 years at 9%.  Blurg.

Rates

Rates have finally found a bit of a range.  5 year bonds have been trading between 1.00% and 1.05% for the last couple of weeks.  10 year bonds have been similarly range bound between 1.62% and 1.67%.  It’s been a frantic market since the US election and yields are generally 40-50bps higher since September 30th.  To be honest, the reduced volatility has been a welcome change.  Adventure?   Excitement?  Hmmph!  Treasury Guy craves not these things. 

The Bank of Canada met on Wednesday this week.  As was widely expected, the overnight benchmark rate was left unchanged at 0.50%.  Apparently the world economy continues to face “undiminished uncertainty”.  In case you were wondering, the last change by the bank was a 0.25% easing in July of 2015 from 0.75% to the current 0.50%.  The last time the bank raised rates was in September 2010, the last of three consecutive hikes that took the overnight rate from a post liquidity crisis low of 0.25% to 1.00%.  The bank next meets on January 18th.  No move is expected.

The US FOMC meets next Wednesday and in a brazen act confidence, traders have now priced in a 100% chance of a hike (based on Fed Fund futures).  100%.  Apparently it’s “Hike, or hike not.  There is no try”.

Securitization

The December 5-year CMB should launch on Monday, for pricing on Tuesday, ahead of the FOMC rate announcement on the 14th.  Dealer’s order books are already full, and the bond is well oversubscribed.  With only $5 billion left under the $40 billion Canada Housing Trust annual issuance cap, we can be fairly certain the deal will not be upsized from the expected $5 billion.  This should be constructive for spreads which have generally narrowed throughout most of 2016 and are currently near their tightest levels of the year.  New issue pricing is expected around GoC’s +40ish.   That compares favourably to the mid 50’s seen in March, but less so compared to the mid 20’s last seen in 2014.

Since we’re talking about the CMB, I will mention that DBRS confirmed the AAA rating of Canada Mortgage and Housing Corporation (“CMHC”) this week.  In completely unrelated ratings news, the Kingdom of Sweden was also confirmed at AAA by DBRS.  Speaking of Sweden, here’s a funny Swedish word.  “Farthinder”.  It means speedbump, only funnier.

TD Securities was in the market yesterday with a $500 million 5 year NHA MBS pool.  The deal was oversubscribed and cleared at the indicated spread of +74 over the curve, the lowest MBS spread since the spring of 2015. 

In generic credit spread news, the CDX IG27 ($US Investment Grade Spread Index) is trading around its tightest level of the year at +69.  To put that in context, it was almost twice that at +124 back in February.

Politics

The Donald continues to assemble his cabinet.  According most observers, you will never find a more wretched hive of scum and villainy.  We must be cautious.

Meanwhile, in South Korea, President Park Geun-hye was impeached over an influence-peddling scandal.  No immediate impact on Canadian mortgage rates.

That’s all for now.  It’s the First National Christmas Party tonight and Treasury Guy is on the decorating committee.  I’ve got a long day of cutting out paper snowflakes ahead of me. 

Have a great weekend.

Treasury Guy
Jason Ellis, Managing Director, Capital Markets