Market commentary

Jan 13, 2017

Good Morning.

Safety Tip
To those of you suffering from Triskaidekaphobia, keep calm and carry on.  Friday the 13th is just another day.  According to the National Safety Council’s handy “Odds of Dying Statistics”, your odds of dying due to “contact with sharp objects” is the same today as it is any other Friday.  Nonetheless, Treasury Guy recommends caution.  Don’t run with scissors.  Especially today.

Bond Yields
The 5 year GoC benchmark (0.75% Sep 2021) is trading around 1.09% this morning.   For context, its six month high was 1.23% on December 22nd and its six month low was 0.56% on September 29th.

The 10 year GoC benchmark (1.50% Jun 2026) is trading around 1.67% this morning.  For context, its six month high was 1.83% on December 15th and its six month low as 0.95% on September 29th.

Securitization
On Tuesday, Merrill Lynch Canada completed the first NHA MBS issue of the year.  The jumbo 5 year pool was originally issued in November at GoC+78.  It was re-opened for $500 million but overwhelming demand allowed Merrill to upsize.  All $1.1 billion of the remaining issue was sold at +73.  Perhaps most significantly, the buyers list was 30 names long, which is almost twice the average for an MBS transaction.  Overall, a great result for Merrill and the market. 

In other issuance news, RioCan was in the market this week with a $300 million 5 ¾ year unsecured note.  The bond was 7x times oversubscribed and flew out the door.   The Federation des caisses Desjardins du Quebec (FCDQ) also took advantage of market tone and issued a $1billion deposit note at GoC+95 which was also extremely well received.  Investors have itchy trigger fingers right now, and as one learned Debt Capital Market observer over at TD likes to say, “When the ducks are quacking, feed them!”

CMB’s are well bid too, and spreads are narrower.  In fact, 10yr CMB spreads are currently +49, almost 10bps narrower than when they were last issued in November.  Next CMB issue is in February and will feature a new 10 year maturity of June 2027.

Commodities
Oil prices were up over $1.00 at one point yesterday on reports that some OPEC members were cutting supply and forecasts of strong demand from China.  The front futures contract for crude oil is currently trading at $53/barrel compared to $27 last January.   That’s up almost 100%!  In case you’re wondering, crude oil is the world’s most actively traded commodity and the sweet crude futures contract is the world’s most liquid form of oil trading.  If you’d like to learn more about futures, I refer you the following explanation from Louis Winthorpe III:

Think big, think positive, never show any sign of weakness.  Always go for the throat.  Buy low, sell high.  Fear?  That’s the other guy’s problem.  Nothing you have ever experienced will prepare you for the absolute carnage.  Super Bowl, World Series – they don’t know what pressure is.  In this business, it’s either kill or be killed.  You make no friends in the pits and you take no prisoners.  One minute you’re up half a million in soybeans and the next, boom, your kids don’t go to college and they’ve repossessed your Bentley.”

Since I know you’re curious, Frozen Concentrated Orange Juice futures are currently trading at $180.70, down from a recent high of $230 in November.  Seriously…I’m not kidding. 

Economic News
It was a light week for Canadian economic releases.  The BoC Q4 business outlook survey on Monday was the highlight.  According to the survey, companies are the most optimistic about investment and hiring since the 2014 oil shock.  The generally positive report combined with last week’s strong employment and trade surplus number could  suggested that Canada’s economy is ready to put the oil crash in the rear view mirror.  Of course, several factors may yet weigh on Canadian economic activity including Trump protectionist policies and the impact on trade relations.  The price of pork bellies will also be a critical factor.

Central Bank
The BoC has its first meeting of 2017 next Wednesday.   The implied probability of a change is virtually zero.  At this point many analysts are predicting that the bank will leave rates on hold for the rest of 2017.

Have a great weekend (and avoid sharp objects),

Treasury Guy
Jason Ellis, Managing Director, Capital Markets