Canada’s latest step to head off the threat of a housing bubble is making bonds sold by the nation’s housing agency increasingly precious.
Canada Mortgage & Housing Corp. said June 6 it will no longer insure financing for condominiums after other steps to cool the housing market. Lower issuance and an end to a six-month rally in government bonds means relative yields for CMHC debt may narrow by five basis points by the end of the year, said Andrew Kelvin, senior fixed-income strategist at Toronto-Dominon Bank’s TD Securities unit.
“Anytime you restrict supply and demand stays the same, you can expect tighter spreads,” Kelvin said by phone from Toronto on June 6. “We could see spreads compress a little bit. We think these are good levels to be owning these rather than government of Canada bonds.”
Policy makers have been acting to curb rising consumer debt and a housing boom they have called a threat to the economy by reducing the amount of insurance available to cover home loans. In 2012, the government gave the country’s banking regulator new powers to oversee CMHC. Finance Minister Joe Oliver pledged in March to continue lowering risks posed to taxpayers in a downturn.
CMHC insurance is fully backed by the federal government. By law, Canadian mortgages that have less than a 20 percent downpayment must be insured.
The rationing has translated into a 10 percent drop in bond sales by CMHC, the nation’s second biggest issuer of debt after the Bank of Canada. The agency has raised C$13.5 billion ($12.4 billion) in the bond market this year in five separate issues, compared with C$15 billion in an equivalent number of sales during the corresponding period in 2013, according to data compiled by Bloomberg.
“When I’ve had cash to invest I’ve been buying Canada Housing rather than provincials,” Kevin Dell, who manages C$500 million of bonds for the city of Edmonton, said in a phone interview. Dell said he holds more CMHC bonds than his benchmarks recommend. “You get extra comfort without giving up that much yield. You won’t get a blow-out in Canada Housing like you do for provincials that are struggling with deficit projections.”
The bonds are poised to rebound after lagging the government bond rally in the first five months of the year, Kelvin said. Since the start of the year, CMHC bonds issued through financing unit Canada Housing Trust have paid a wider premium relative to government benchmarks, increasing to 25 basis points from 20, according to Bank of America Merrill Lynch index data. Peers in the Canadian Provincial & Municipal Index have widened one basis point over the period.
Investors demand 45 basis points more to hold CMHC’s 3.15 percent note maturing in Sept. 2023 compared with government benchmarks, five basis points more than on Feb. 25, Bloomberg data show.
Economists surveyed by Bloomberg News from May 2 to May 8 project Canadian benchmark 10-year yields will end the year at 3.01 percent, according to a weighted average of 20 analysts. The 2.5 percent benchmark note due June 2024 dropped 1 basis point to 2.32 percent June 6. Yields have fallen 44 basis points since the start of the year.
“When you have very low government of Canada yields, you tend to have wider spreads,” Kelvin said. “Consistent with our call for government of Canada 10-year yields rise in the second half of the year, we think it makes sense to switch” into CMHC bonds, because their yields will rise more slowly.
CMHC said in its June 6 statement it would no longer provide multi-unit, condo construction insurance. The agency said it had about C$378 million of insurance-in-force for condo construction as of March 31.
CMHC also guarantees mortgage-backed securities used by financial institutions to raise funding for housing loans, as well as the debt it issues, known as Canada Mortgage Bonds. CMHC will back C$120 billion in mortgage-backed securities and Canada Mortgage Bonds this year, down 2.1 percent from C$122 billion in 2013, it said May 5. It capped the amount it guarantees in August to C$350 million per lender.