Round Up

Lots going on in the mortgage finance world this week. Let’s take a brief look at some things that fall off the beaten path.

How Stressful: Today was supposed to be the day that OFSI removed the stress test from switches at maturity. Of course, in true government department fashion, no clear rules have been released so lenders still can’t really do the switch and remove the stress test. Too bad there wasn’t as much urgency put on meeting deadlines as there seems to be about donating taxpayer money to foreign countries. Here is hoping that OFSI gets their shit together and releases some clear directives so lenders can remove the stress test and give Canadian more choice at renewal. Of course the incumbent bank ( Canada’s big 5 ) stand to lose the most, and let’s be honest here – we all know who OFSI works for.

White Collar: Finally after months and months and years of talking about verifying income on mortgage applications through the CRA, comment periods opened up today. Industry participants have the ability to weigh in and add their thoughts to what will eventually become a direct income verification system linked to the Canada Revenue Agency. This system has existed in the US for decades, and I must say it works quite well, and collapses a lot of time frames. In the US they often don’t need to verify documentation outside of the linkage with the IRS. Although, there will be a lot of shady brokers and agents shaking in the boots right now. Gonna be a whole lot harder to commit fraud after that linkage goes into effect. Although, I am sure it will be years before it actually goes live – let’s face it, with the Canadian Government in charge, nothing moves swiftly. It will be fascinating to me to see the data after there have been a year or two if fraud rooted out of the system. How many sales were based on pure income fraud and income documents being made for a fee? Well, we will find out.

Bonds Gone Wild: The great thing about writing a blog is that everything you say is time and date stamped forever. When you put everything out for the world to see, there isn’t really a way to deny what you said. Well, not long ago I said that bond yields were about to rise. Now, I got a lot of shit about that. I got a lot of comments saying that they thought I was wrong, and then listed off the 78 reasons why bond yields have to go down. I reminded people that nothing has to “do” anything, and that the risk to bond yields was higher – even with central bankers pulling out their scissors to the overnight lending rate. I suggested at the time that rate holds were gonna be important, and that locking in pre approval rates would be a massive advantage for you.

Well, here we are just a few weeks on, and holy shit – look at those yields. In the last 30 ish days or so, Canada 5 years have jumped 55 ish bps. That is not insignificant. Below are the reasons I think we have jumped:

Donald Trump is going to re ignite the US economy ( or so the promises go ), and with that growth should start to rise, and that will pull yields up.  I think the market is seeing a lot of promise in the US economy over the next few years. As go US yields, so goes Canadian yields as has always been the case. If growth and GDP are expected to be better than previously thought, yields have to adjust.

Second of all, and this is a big one….Inflation has not gone away like central bankers wanted it to.  Everywhere you look the inflation reading is going up.  The US saw an uptick in October, Canada surprised to the upside for October, and the UK jumped to a 6 month high in October.  Inflation will just not seem to die, and as such, bonds yields have to rise to offset the potential for higher than we would like inflation. Sure, inflation has come down a lot from the peak of 2022, but it seems to still have some life left in it. Canada will also start to see the effects of inflation picking up as the CAD has depreciated, rising the cost of imports. Yes, oil per barrell is down, but oil is still purchased in USD. A lot of food in the grocery store comes from California, Mexico etc. I am not saying we see inflation shoot back up, but it will probably rise enough to put the central bankers in an uncomfortable spot.

Thirdly, I think you are seeing a bit of a buyers strike on bonds.  People just aren’t as comfortable holding government debt at low yields as they were a few years ago.  If buyers won’t buy, the only way to entice them is to get a lower price, or a higher yield, or both.  Western governments have proven they will run deficits no matter the economic landscape, and bond holders are getting a tad bit nervous.

The Path forward: Based on a lot of technicals in the bond market, here is where I think we go from here. Keep in mind this is just for the Canada 5 year, and banks may adjust spreads to account for this. Just because the 5 year yield goes up, does not mean mortgage rates go up exactly the same amount. Ditto for the downside.

We are getting near the top of the band right now on yields, and bumping up against some resistance levels.  3.34% seems to be a nice resistance level.  With the 5 year closing at 3.29% today, we will either hit that 3.34% and drop back down, or break through the 3.34% and that becomes the floor.  After 3.34% the next resistance hits around 3.68% ish area.  For the sake of mortgage holders in Canada I hope the 3.34% is a strong ceiling and we don’t break through.    If we cannot break the 3.34% ceiling, then the floor looks nice and comfortable around 3.04 – 3.01% range right now.  If we see an uptick in inflation, a policy announcement out of the US that markets think will supercharge growth, then we probably spike through the 3.34% level.  If however, we see inflation tame back down, and kind of muddle through, there is really nothing that has the jet power to launch the 5 year through that 3.34%.  My gut tells me that if we break through the 3.34% it will be with force, and all at once.  It won’t be a bp here, 2 bps there kind of rise, but rather a strong and violent move through the 3.34% level. Once we clear 3.34%, there is not a lot stopping yields from going up to 3.68% range. Likewise, a very low inflation reading, a disappointing GDP report, and yields go zoom back towards the 3.04% level without a lot of work.

Going Postal: With Canada Post on strike…..again, it may be a great time to go through your database and make sure clients are all signed up for their mortgage statements electronically. It is also a great reason to touch base with your clients from a non sales related touch point. If you were to call all of your database, and just check in with a simple little item like this, I bet you pull a refinance or two out. No need to split the commission with me though for the tip. As we head into year end, you never know what is going on with your clients, so calling them for a check in, and reminding them to sign up for e statements, is also a great intro to speak with them and ask them for referrals, see about an early renewal, and who knows what else. In a year like 2024 every little deal you can pull counts.

Next week will be a fairly muted week for bonds with the Giving of Thanks celebration in the US on Thursday. The US Bond market is closed Thursday for the holiday, and has shortened trading hours on Friday, closing at 2 pm. Most of the senior bond traders will be out of the office starting Friday afternoon of this week, so the juniors are running the bond desks. They have lower limits, less authority, and unless we see some massive geopolitical issues crop up, volume will be about half a normal trading week. Not to say things can’t get spicy if global tensions rise, but notwithstanding Russia and Ukraine lobbing nukes at each other, it should be pretty quiet. A lot of attention also turns to retail stock trading with Black Friday shopping, and bonds take a back seat. This will give the Canadian bond market a bit of time to settle in to its new home around the 3.30% level, and see if it can find any direction.

I hope you locked in those pre approval deals a few weeks ago, and I hope you can finish your year with a bang.