Housing Trust Pays Lower Rates on Foreign Demand: Canada Credit

Canadian homebuyers are benefiting from concern that European governments can’t finance budget gaps.

Canada Housing Trust, the financing arm of the nation’s housing agency, sold C$2.15 billion ($2.1 billion) in 3.35 percent bonds maturing in December 2020, as well as a C$2 billion of five-year floating-rate notes, at the lowest cost since February on increased demand for the country’s securities. The fixed-rate debt was priced to yield 34 basis points more than comparable Canada government bonds, the narrowest gap since the housing agency began selling 10-year bonds 21 months ago.

Canada Housing is benefiting from international confidence in the country’s economy and investors’ reluctance to seek refuge in U.S. bonds -- as they did in May -- because of skepticism about the U.S. Federal Reserve’s monetary easing program that makes U.S. Treasuries less attractive, said Carlos Leitao, chief economist at Laurentian Bank Securities in Montreal.

“It’s a little different than last spring in the sense that the U.S. Treasury is not receiving all of these safe-haven bids,” Leitao said in a telephone interview. Now, as Europe struggles with its finances, “the winners appear to be Canadian.”

Canada Mortgage and Housing Corp., through Canada Housing Trust, provides financing for banks and other mortgage sellers, to lower their costs and promote competition. Canada Housing Trust began selling bonds in 2001, and has about C$189.5 billion of debt outstanding, including C$171 billion in fixed-rate bonds and C$18.5 billion of floating-rate notes.

Mortgage Rates

Bank of Canada data show five-year fixed mortgage rates were the near the lowest in more than 50 years last week. On Wednesday, Canadian banks including National Bank of Canada, Laurentian Bank of Canada and Canadian Imperial Bank of Commerce, announced a quarter-percentage point increase in their five-year fixed rates.

Elsewhere in credit markets, the extra yield investors demand to hold the debt of Canada’s corporations rather than its federal government, narrowed yesterday to 134 basis points, or 1.34 percentage points, from 135 basis points the day before, according to Bank of America Merrill Lynch data. Yields rose to 3.85 percent from 3.81 percent the day before.

Relative yields on U.S. corporate bonds ended Nov. 17 at 177 basis points, the Bank of America Merrill Lynch data showed. Global corporate spreads were 167 basis points. Canadian corporate bonds have lost investors 1.1 percent this month, compared with declines through Nov. 17 of 1.2 percent for U.S. company debt and 0.9 percent for global corporates.

Provincial Bonds

In provincial bond markets, relative yields were unchanged yesterday at 52 basis points. They reached as wide this year as 71 basis points in May. Yields rose to 3.23 percent, from 3.20 percent the day before.

Provincial bonds have lost 2 percent this month, headed for the worst performance since September 2008.

Government bonds dropped yesterday, with the price on the 1.5 percent security maturing in December 2012 falling 10 cents to C$99.75. The yield increased as much as five basis points to 1.63 percent.

Canada’s government bonds have lost 1.5 percent in November, headed for the worst performance since December, the Bank of America Merrill Lynch data show. Treasuries are down 1.1 percent this month through Nov. 17, and global sovereigns have lost 0.9 percent.

Covered Bonds

Capital Desjardins sold C$700 million of fixed-to-floating-rate bonds due Nov. 23, 2020. The notes, which are callable at par in November 2015 and have a coupon of 3.797 percent, were priced to yield 143 basis points over federal benchmarks for the fixed portion. They will pay 132 basis points over the 3-month Canadian dealer offered rate on the floating-rate portion.

Canadian sales of covered and junk bonds may increase following the global financial crisis, according to a research paper by the country’s central bank. Local investor demand is rising for junk bonds, which refers to high-yielding and high-risk debt, the Bank of Canada said in the paper, with the size of mutual funds dedicated to that part of the debt market growing to C$9.5 billion at the end of 2009 from C$4.4 billion a year earlier.

“Sovereign debt risk in Europe seems to be top of mind,” said Ric Palombi, a Calgary-based fixed income portfolio manager at McLean & Partners Wealth Management, which oversees more than C$1 billion. “Foreigners, who fear Europe’s debt problems could spread from Ireland to Spain and Italy, love Canada.”

Less ‘Sensitive’

The government housing agency paid more relative to government bonds when it sold C$2.8 billion of 10-year, fixed-rate debt in May, during the first part of the European debt crisis, because of investors’ caution, said Mark Chamie, CMHC’s treasurer in Ottawa. The May bond priced 41 basis points above an implied government bond with the same maturity, compared with 29 points for this week’s sale.

While there is renewed concern about Ireland and Portugal, “the market isn’t as sensitive to all these new shocks,” Chamie said. “People have become a lot more used to these sorts of news stories coming and potential for impact.”

The Canada Housing Trust issues came the day before Statistics Canada data showed the country may see record foreign purchases of securities for a second straight year. Non-residents bought C$8.8 billion of bonds in September, the government agency said.

“Investor demand exceeded the issue size for both tranches,” Sunil Bhutani, a Toronto-based managing director of debt capital markets at Canadian Imperial Bank of Commerce, lead coordinator of the 10-year issue, said Nov. 17 in an e-mail.

Smaller Premium

Canada Housing’s floating five-year bond was sold at a premium of 12 basis points above the Canadian dealer offered rate, lower than the 13 points it had to offer during its May sale of C$2.3 billion of bonds.

A slowing Canadian economy means bonds may be poised to rally as increases in benchmark rates become less likely, McLean & Partners’ Palombi said in a Nov. 17 telephone interview.

“As the economy slows, Canadian debt will be looking increasingly attractive because we aren’t expecting much from the Bank of Canada in terms of higher rates,” Palombi said. “We could see a pretty good rally.”

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