Greetings,
It’s mail-it in Friday as we head towards the end of what felt like a very long short-week. Maybe it’s the pretty ugly weather we have in Toronto right now or my love-hate relationship with the Maple Leafs - either way, it’s the same difference, and I think it’s safe to say that the weekend can’t come soon enough.
Rates and Curves
Rates rallied hard on Tuesday and have only partially recovered since. The 5-year Government of Canada (“GoC”) bond yield opened on the week at 0.93% and dropped as low as 0.86% on Tuesday. Similarly, the 10-year Government of Canada bond yield began the week at 1.54% and went as low as 1.45% on Tuesday. The 5 and 10-year GoC yields now sit at 0.91% and 1.50% respectively. This move down feels like a bit of a temporary reprieve with the inflation narrative taking a back seat for the time being, but it is still worth keeping your eye on the ball since headlines and subsequently rates move fast in this market.
The 5 and 10-year Canada Mortgage Bond (“CMB”) closely followed suit hitting lows of 1.11% and 1.81% this week and have since stabilized around 1.16% and 1.86%. Credit spreads on the 5 and 10-year are currently at 24.5 basis points and 36.5 basis points respectively.
Canada Mortgage Bond
Last week Canada Housing Trust (“CHT”) issued its regular quarterly 10-year Canada Mortgage Bond. If you recall back in February, CHT issued a larger 10-year CMB as they continue to work towards increasing their annual 10-year issuance sizes. Unfortunately, the issuance in February came at a time of increased market volatility and did not perform as expected with supply far outweighing demand (prices down, yields up). Within the next few days we saw a large widening of credit spreads meaning the spread between the CMB and the underlying GoC increased.
At the time, this would have been a significant headwind for any real estate investor looking to lock in their mortgage rate given the wider than normal credit spread.
For the May 10-year CMB, CHT reduced their total issuance size to a less aggressive level compared to February. The total issuance was $3.5 billion and they hit it right on the money. The CMB issue was well received and spreads are another 1-1.5 bps tighter this week with continued market buying of the bond.
We are hopeful that with the solid demand and performance of this deal, CHT will venture out slowly and begin increasing their issuance sizes once more leading to higher allocations for participating MBS sellers. This would be good news for real-estate investors who would have easier access to 10-year liquidity. The next 10-year CMB is expected in August and will feature a new December 2031 maturity date.
Lastly, as we quickly approach June 1 (already!) we expect a re-opening of the 5-year CMB in mid-June and then the treasury team can take a well-deserved month off in July!
New Stress Test Benchmark Rate
Over to the residential side of the equation. This week, OSFI finalized that it will use a fixed rate of 5.25% as the benchmark rate for uninsured mortgages and the Department of Finance decided that it will align the minimum qualifying rate for insured mortgages with uninsured mortgages. The benchmark rate will increase from 4.79% to 5.25% and the way borrowers qualify will be at the maximum of the contract rate + 2% or the benchmark rate. Previously, insured mortgages qualified at the maximum of the contract rate or benchmark rate.
The changes will be effective beginning on Tuesday, June 1, 2021 and the benchmark rate will be reviewed annually in December for adjustments. While the benchmark rate change is more restrictive to potential borrowers, it is not anticipated to cause a significant decline in overall mortgage demand.
Fun(d) fact!
We are all about the wordplay today. VOO is the ticker for the Vanguard S&P 500 ETF which I recently learned was named VOO based on the roman numeral V (5) and OO for ‘00’. In hindsight, this seems obvious, but I’d be lying if I said I had picked up on it. Can you guess what Vanguard’s S&P 400 ETF ticker is? If you said IVOO, you would be correct.
On that note, I sincerely hope you all have a great weekend!
Neil