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Market commentary - July 22, 2016

Jul 22, 2016

Greetings Capital Market and Kraft Dinner enthusiasts,

It’s been nearly a month since we got together and chatted.  In fact, my last post was the morning after the shocking BREXIT results.  A lot has happened between then and now, so rather than explaining much today, let’s just sum up.  It’s a lazy move by me, but it gets us caught up, yes?

Five year bond yields had fallen as low as 0.54% on June 27th (the Monday after BREXIT).  In the meantime, yields have slowly moved back up to 0.68%. (1.08% to 1.12% for 10 Year bonds.  Note the 10bp flattening of the curve).

The TSX, following a brief retreat is now trading at an all-time high of 14,565 (up 6.4% or 165% annual equivalent) since June 27th.

Credit spreads are generally narrower since BREXIT.  After initially gapping wider in the ‘risk-off’ move that drove government bond yields lower, spreads have more than recovered.  The broadly watched US CDX Investment Grade index is now at +72 versus +92 following the BREXIT.  Domestically, CMB and Senior Bank debt spreads are 4-5 basis points tighter.

Of some relevance for insured mortgage market participants, we have crossed the July 1st implementation date for a number of changes to the securitization market:

CMHC Fees
In what CMHC describes as an effort to “encourage the development of private market funding alternatives by narrowing the funding cost difference between government sponsored and private market funding sources”, it has increased the fees it charges to issue NHA MBS securities and to sell them into the Canada Mortgage Bond Program. 

Directly impacting lenders like First National and Borrowers like you, the fees to pool and sell a mortgage into the Canada Mortgage Bond Program has increased by about 33% as a result of the changes.  In terms we can all understand, that’s about and extra 5-7 basis points on the cost to fund 5 and 10 Year CMHC insured multi-family residential mortgages.

Eligible Mortgage Loan Regulations (aka: “The Ban” and the “The Purpose Test”)
July 1st also marked the implementation date for the ‘the ban’ on the use of insured mortgages in non-CMHC sponsored securitization vehicles.  In plain terms, lenders will no longer be permitted to fund insured mortgages using resources like Asset Backed Commercial Paper.  An insured mortgage can now only be securitized using CMHC’s NHA MBS program.  (If you can figure out how that helps achieve CMHC’s objective to “encourage the development of private market funding alternatives”, send me a note, cuz I’m still scratching my head about that one).  Good news for CMHC insured Construction and Multi-Family borrowers.  Your mortgages aren’t captured by the changes.  Only ‘Single-Family’ residential mortgages are affected, so send those deals in.  Our operators are standing by!

In addition to the ‘ban’, the related ‘Purpose Test’ came into effect this month.  Any low ratio mortgage that is subsequently portfolio insured (insured along with a similar group of mortgages with the default insurance premium paid by the lender) must be securitized into an NHA MBS pool or the purchased insurance will be cancelled with no return of premium to the lender.  Again, this only affects single-family residential loans.

New NHA MBS Allocations
Finally, among other changes to the allocation processes, CMHC has awarded mortgage trading desks known as “Aggregators” their own allocation of NHA MBS pool guarantees…separate from and in addition to, their sponsor bank.  This is great news for the Aggregators and for the smaller mono-line mortgage lenders that sell their mortgages to Aggregators  as it opens up the funding possibilities beyond the CMB and into the larger secondary NHA MBS market.  That’s as much as an extra $5 billion of securitization funding per year for each aggregator.  Of course, the utility of that funding depends on the health of the MBS market, which is a perfect segue to the next paragraph.

NHA MBS Market
July saw three syndicated NHA MBS transaction in consecutive business days.  On Friday July 8th, Concentra Financial launched their inaugural syndicated deal.  $377 million issued at GoC+91 bps.  The issue was well received, but there was definitely a small ‘new issuer’ concession in the spread.  The following Monday, Merrill Lynch Canada came with a $600 million re-opening of the $1.2 billion ‘jumbo’ deal that was first launched in May.  The deal was well received and traded 1bp tighter than indicative pricing at GoC+85.  Finally, on Tuesday, wasting little time in utilizing their newly granted MBS allocations, TDSI, the ‘Aggregator’ at TD Bank, issued its first pool since the MBS allocation rules were first modified about 3 years ago.  Another $435 million was taken down by the market…this time at GoC+86.

While all that was happening, RBC was in the market with a 5 year deposit note that grew to $1.75 billion and priced tighter than indicated at Goc+106.  BMO also got in the action with a $750 million inaugural issue of Fortified Trust, a 5 year term securitization of Real Estate Secured Lines of Credit.  As the Debt Capital markets folks like to say…”when the ducks are quacking, feed them”.

Anyway…I’ve gone on too long and we’ve only scratched the surface.  I guess that’ll teach me to skip too many Fridays in a row.

Watch out for the Fed’s rate announcement next Wednesday.  The probability of a hike is only 8% based on Fed Fund futures contracts.  Most traders will be focused on the related statement to see how much BREXIT might be influencing future FED decisions.  Current probability for a cut at the September meeting is 26%.

The next meeting for the Bank of Canada is not until September 7th.  There is basically a 0% probability of anything happening that day.  (But a 100% chance of Treasury Guy’s birthday!)

OK, that’s it.  I’ve got to go.  There’s a Pikachu around here somewhere with my name on it.  (For clarity, NO, Treasury Guy DOES NOT play Pokemon GO.  I’m just trying to be culturally relevant while appearing hip to the kids out there). 

It’s gonna be a scorcher this weekend.  I recommend sunscreen and lots of beer.

Treasury Guy OUT.