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Housing Trust Borrowing Costs Rise After Crisis: Canada Credit

Canada Housing Trust, the financing arm of the nation’s housing agency, had to offer a higher premium to sell mortgage bonds as investors were concerned about contagion from the European fiscal crisis.

Canada Housing yesterday sold C$2.8 billion ($2.7 billion) in 3.75 percent bonds maturing in March 2020, as well as a C$2.3 billion in five-year floating-rate notes. The fixed-rate debt was sold to yield 39 basis points higher than government bonds, compared with a marketing spread of 36 basis points.

“It does indicate that credit markets, even in Canada, are still not back to normal levels” after Europe’s fiscal crisis, said Carlos Leitao, chief economist with Laurentian Bank Securities in Montreal. “You see these wider spreads even in Canadian markets that, in my mind, can only be justified by the international environment of aversion to risk.”

Canada Housing isn’t alone in facing wider spreads on its debt. The gap between 30-year provincial bonds and their federal counterparts widened last week to the highest level in almost a year and the premium companies paid widened more than 20 basis points since March.

“Spreads were moving out, so we had to follow with that,” said Mark Chamie, Canadian Mortgage and Housing Corp.’s treasurer in Ottawa. “It really had to do with the ongoing nervousness of what’s going on in Europe and the spillover effects that that has, even to the North American markets.”

Elsewhere in Markets

Leitao said he expects spreads will narrow over the next two weeks, as concern over the European situation dissipate and the Bank of Canada raises its benchmark overnight rate on June 1 in a signal “the economy is returning to normal.”

Elsewhere in credit markets, the Bank of Canada increased offerings of Treasury bills maturing in September by C$1.6 billion. It also sold C$600 million of Treasuries maturing in November and C$600 million of May 2011 treasuries.

Foreigners unexpectedly sold a net C$616 million of Canadian securities in March, the first decrease in 15 months, Statistics Canada said yesterday. Foreign investors divested C$1.86 billion of money-market paper, with federal government Treasury bills accounting for two-thirds of that, cutting their holdings to the lowest since November 2008.

Inflation likely accelerated in April, according to a Bloomberg survey of economists. Statistics Canada will release the data on May 21 at 7 a.m. New York time.

The yield gap between 30-year Canadian bonds and their U.S. counterpart narrowed to the smallest since May 7, with the yield on Canadian debt 43 basis points below the yield on U.S. debt.

Mortgage Financing

CMHC, through the Canada Housing Trust, provides financing for banks and other institutions that sell mortgages to lower their costs and promote competition. Canada Housing Trust began selling bonds in 2001. An evaluation of the first five years of the program found it lowered costs to institutions by 18 basis points and to individuals by 3 basis points.

Compared to a made-up government bond with the same March 2020 maturity, the spread on the bond was 41 basis points, against 24 points at a similar sale in February.

Chamie said that while higher borrowing costs will trickle down to banks and individuals, the program still cuts costs as the spreads on bank bonds have also widened.

The trust has about C$180 billion of debt outstanding, including C$162 billion in fixed-rate bonds and C$18 billion of floating-rate notes.

Canada Housing’s floating five-year bond was sold at a premium of 13 basis points above the Canadian dealer offered rate, higher than the 10 points it paid in February.

Home Sales

“These are still very attractive levels,” said Sunil Bhutani, managing director of government finance at Canadian Imperial Bank of Commerce, which was among the banks leading the sale, adding that the bond was marketed at a 14 point spread.

Canada’s housing market, much like the rest of the country’s economy, has rebounded from last year’s recession. Home starts were at a pace of 200,700 units a year in April, compared with 112,000 in April 2009, the slowest in 13 years. Sales of existing homes between January and April were 63 percent higher than during the same period a year ago, the Canadian Real Estate Association said on May 17.

RBC Capital Markets, BMO Capital Markets, CIBC World Markets and TD Securities were joint lead underwriters for the latest quarterly CMHC offerings.

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