Mortgage Bond Sales Drop From 2009 Record as Yields Widen: Canada Credit
Mortgage Bond Sales Drop 16% From 2009 Record
Norm Betts/Bloomberg
Reduced sales of Canada mortgage bonds may mean more expensive mortgages for consumers as banks turn to higher-cost funding sources, DesLauriers said.
Reduced sales of Canada mortgage bonds may mean more expensive mortgages for consumers as banks turn to higher-cost funding sources, DesLauriers said. Photographer: Norm Betts/Bloomberg
Canadian mortgage bond sales fell 16 percent this year and may be little changed in 2011 as the country’s housing agency cuts supply to reduce borrowing costs.
Canada Housing Trust, the financing arm of the nation’s housing agency, sold C$39.4 billion ($38.9 billion) this year, according to data compiled by Bloomberg. Issuance ballooned to a record C$46.9 billion last year as the credit crunch limited other sources of funding for banks and mortgage lenders.
“It was becoming apparent in spread performance that maybe the supply was outpacing demand,” David DesLauriers, managing director of government finance at Toronto-Dominion Bank, said by phone from Toronto. “The program started to lower the size of the issues.”
Although many factors influence mortgage rates, reduced sales of Canada mortgage bonds may mean more expensive mortgages for consumers as banks turn to higher-cost funding sources, DesLauriers said. Canada mortgage bonds are backed by the federal government, making them a relatively inexpensive form of financing.
Canada Housing, the nation’s largest debt issuer after the federal government, sold C$23.8 billion worth of five-year fixed-rate bonds, C$7.9 billion of five-year floating-rate bonds and C$7.8 billion of 10-year fixed-rate bonds this year. The Ottawa-based trust, which issues quarterly, buys mortgages to back the debt sales.
Canada Housing has “done a better job aligning the size of mortgage bonds with investor demand,” Andrew Hainsworth, director of debt capital markets at Bank of Montreal, said by phone from Toronto. “They want to get a little bit of spread performance out of CMBs. It’s also part of the repairing of the credit markets after the financial crisis.”
Outpaced Ontario
Relative yields on Canada Housing five-year bonds traded at about 25.5 basis points over federal benchmarks this week, versus 23.5 basis points at the beginning of the year, according to Hainsworth. By contrast, Ontario five-year spreads have widened about six basis points this year.
Elsewhere in credit markets, the extra yield, or spread, investors demand to own the debt of Canadian corporations rather than the federal government widened to 140 basis points yesterday from 139 basis points on Dec. 21, according to a Bank of America Merrill Lynch index. The spread was as narrow as 114 basis points in March, the data show. A basis point is 0.01 percentage point.
Canadian corporate bonds returned 6.9 percent this year, including reinvested interest, according to the Merrill Lynch index, which tracks 722 bonds with a par value of C$284 billion. The bonds rose 15 percent last year.
Provincial Gains
The spread on U.S. corporate debt over Treasuries was 169 basis points as of Dec. 21, according to another Merrill Lynch index, unchanged from Dec. 20. Treasuries have lost 2 percent this month, paring their return for the year to 5.7 percent, Merrill Lynch data show. Canadian government bonds have slipped 0.3 percent this month as of yesterday, trimming the 2010 gain to 5.9 percent.
In the provincial bond market, relative yields were 53 basis points yesterday, from 52 on Dec. 21. They shrank to 39 basis points in January, the narrowest this year. The bonds returned 6.8 percent this year.
Gross domestic product grew 0.2 percent to a seasonally adjusted annual rate of C$1.24 trillion in October following a 0.1 percent contraction in September, Statistics Canada said today in Ottawa. That’s less than the 0.3 percent median of 21 forecasts compiled by Bloomberg.
Spreads on mortgage bonds were as narrow as 18 basis points early in 2010 and as wide as 46 in May amid the European sovereign debt crisis, Hainsworth said. Issuance has averaged about C$27 billion annually, Bloomberg data show.
2011 Outlook
Canada Housing considers demand for funding from mortgage lenders, investor appetite for the debt and the performance of the broader credit markets when deciding the scale and pricing of the issues, the trust said in an e-mailed statement.
Issuance may be C$40 billion in 2011, based on current issuance of about C$10 billion a quarter, according to Hainsworth. Apart from taking part in the Canada Mortgage bond program, lenders can fund mortgages by other means such as issuing covered bonds, packaging the mortgages and selling them as mortgage-backed securities, or funding them via deposits, Hainsworth said.
“That’s a fair estimate of what we’ll be looking at in the quarters to come, given what we know right now,” DesLauriers said, referring to the C$40 billion forecast.
Canada Housing paid 26.5 basis points over government benchmarks on Dec. 15 to sell C$6 billion in five-year, 2.75 percent debt. About a quarter of the issue, which was lead managed by TD, Bank of America Merrill Lynch, Canadian Imperial Bank of Commerce and Royal Bank of Canada, was purchased by international investors.
The issue brought the total of Canada mortgage bonds outstanding to C$195.5 billion, with the majority, C$173 billion, being fixed rate and the rest floating rate.
To contact the reporters on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
Rate These Stories
Rate this Page