Market Commentary - March 11, 2016

Mar 11, 2016


Apologies for not writing last week and thanks to those of you who actually noticed.  Alas, it was Men’s Day at the ski club and debauchery was afoot...but the details of my life are quite inconsequential.  I’m back now and we’ve got a fair bit of ground to cover.  Let’s get started with the central banks.

The BoC left the overnight rate unchanged at 0.50% on Wednesday.  This was expected.  The economy has evolved largely as forecast since the January Monetary Policy Report (“MPR”) and while oil is only just now approaching levels suggested in the MPR, the fiscal stimulus expected in the Federal Budget later this month is enough to keep the bank patient.   The next meeting is scheduled for April 13th and the implied probability of a 25 basis point cut is around 12%.

The European Central Bank (“ECB”) went for maximum impact with a whole suite of easing options announced on Thursday.  It cut all benchmark rates including a 10 basis point reduction to the deposit facility (now at -0.40%).  Perhaps more significantly, the Quantitative Easing (“QE”) program was increased from 60 to 80 billion Euros per month.  Eligible QE investments were also expanded to include non-bank investment grade corporate bonds.  This was very constructive for credit spreads.   Much of the initial market enthusiasm, however, was reversed later in the day when ECB President Mario Draghi announced that in the governing council’s view it would not be necessary to reduce rates further.   Party Pooper.

The US Federal Reserve (the “Fed”) meets next week and will likely hold short term rates steady.  The implied probability of a 25 basis point hike, as given by Fed Fund futures, is only 4%.  Expect a message from the Fed that keeps options open for a hike in April or June should the economy perform well in the weeks ahead but without committing to a move in case things start going sideways again.  

In mortgage securitization news, Bank of America Merrill Lynch (“BAML”) launched a ‘jumbo’ $900 million single family residential NHA-MBS issue on Wednesday.  The intention was to issue only $450 million but strong demand allowed them to upsize the deal and issue all $900 million.  Nice!

Canada Housing Trust (“CHT”) should be launching a new ‘5 year’ CMB issue on Monday.  Expect a $5 billion deal maturing in June 2021.  According to dealers, the book is building nicely with interest from the full spectrum of investors.  CMB spreads have actually performed relatively well recently, but are still at generally wide levels historically and represent a great opportunity for investors to pick up government guaranteed AAA credit at a significant spread. 

Let’s use the CMB as a segue to comment on rates and spreads.  My last posting was called the “Doom and Gloom Edition”.  Fortunately, much has changed since then.  As we all know, February 11th is the “Day of Revenue Service” in Azerbaijan (which sounds like a great holiday), but it also seems to have been some kind of economic inflection point in 2016.  Yields and spreads have made a giant ‘U-turn’ over the span of two months.  Have a look at the numbers below and you’ll see what I mean:

Jan 11th

Feb 11th

Mar 11th

5yr GoC




10yr GoC




5y MBS Spread




5yr CMB Spread




10yr CMB Spread




5yr Bank Deposit Note








Oil (WTI)




It’s been a remarkable move and I can’t put a finger on what the primary catalyst has been, but the rally in oil and some other commodities has certainly helped.  The fact that Leo finally got his Oscar didn’t hurt either.

In up to the minute news, The February Canadian Net Change in Employment (or ‘random number generator’ as one observer describes it) was released this morning.  Market expectation was +10.0k with unemployment at 7.2%.  Actuals came in at -2.3k and 7.3%.  Oops.  GoC’s had been up another 3 basis points in early trading but are back to unchanged following the jobs data.

No worries though.  Equity markets are rallying with Euro markets up more that 2% and futures pointing to a strong open in North America.  Oil is also up another 2% this morning and CMB’s, Provies, and other strong credits continue to outperform.   All that and it’s going to be motorcycle riding weather this weekend!

In other good news, First National released its 2015 results back on February 23rd and the stock has set new 52 week highs almost every day since.  Thanks to all our customers and partners for helping make 2015 such a successful year.

Anyway, it’s March break next week, and that means trips to Rangoon, luge lessons and meat helmets!  Be safe and party on.

Treasury Guy.

Jason Ellis
Managing Director, Capital Markets