Do as I Say, Not as I Do

The news cycle seems to move fast these days, and if you haven’t read the news since before dinner, you are out of date. The on again – off again tariff wars, stock markets, bond yield moves, and political climate make it so that you can assume nothing, trust no one, and certainly not take anything for granted.

From my little perch down on the US Gulf Coast I am somewhat insulated from the daily ins and out of the goings on North of the 49th. However, it has become quite apparent that this little spat between the 2 countries is not going away anytime soon. They say what is old is new again, and it seems like once again the North is at war with the South.

The one thing that never seems to change though is that politicians always seem to have rules for thee, but not for me. While the political elite have spent the last few weeks spouting about their love for Canada, the Canadian Government has not so silently been preparing to auction off some bonds. Normally this would be mundane, and trust me – it still is, but this year it has a little bit of a twist. While Canadian politicians are on the daily news telling everyone to Buy Local, Buy Canadian, and yanking Jack Daniels off of the shelf, the Canadian Government is busy preparing to auction off some 5 year notes denominated IS USD!!! So, don’t drink American Whiskey, but using USD as the basis for a bond auction is fine?

FUCK! RIGHT! OFF!.

Now, this is not a new thing – Canada has before auctioned off government bonds in USD, but the timing couldn’t be worse. Talk about bad optics? During a trade war with another country, should you really be underpinning your auction using their currency? Canadian politicians have gone on and on about how America needs Canada, but actions always speak louder than words, and apparently, Canada needs America – at least for their currency.

This auction has some potential upside, and a really bad downside risk. If the USD is at the highpoint as many suspect, and falls from here, then getting the USD now is a wise move, as it will cost the government less to pay the USD interest, and eventually cash the note out later. However, if the USD continues to strengthen against the CAD, then the government could fin itself shelling out EVEN MORE Canadian dollars to buy the USD to pay the interest, and eventually the note off. I guess it all depends if you think the Canadian dollar will get stronger or weaker.

The Canadian treasury is saying they are doing this to shore up foreign reserves, and keep them in a range. This makes sense. A Central bank always wants to have some foreign reserves on hand. Of course, it is really too bad the people that run the reserves didn’t think to Issue the bond / buy the USD when a CAD was worth 75 to 80 cents instead of the 69 cents it is worth right now.

No matter your feelings on whether the currency will go up or down, you really have to wonder about a government that continues to pump the Buy Canadian movement all the while buying the currency of the country they are fighting with. It is just like fighting with your neighbour, but still borrowing his lawnmower to cut your grass every week.

There is also a distinct possibility that the Canadian Government is having trouble raising funds when they are issued in Canadian dollars. If international investors are worried about CAD continuing to slide lower, then they may be less apt to buy Canadian bonds. However, if those bonds are issued in the more trusted US currency, it may remove some of that currency risk for the international investor. Please understand, I am not saying it is the case, but if we start to see Canadian government bonds have issues raising funds, this will have been the canary in the coal mine. It certainly is something to put on the ‘ wait and see where it goes list’ .

Tomorrow we will find out about the next rate cut ( which is almost a given at this point ) so we should see some more weakness in the CAD. 5 year yields are actually showing a bit of an uptick, even though the stock market is melting down by the day. Traditionally I would expect to see bonds pick up a bid here ( yields go lower ), but bonds haven’t been raising the capital like in previous cycles. Perhaps the bond market isn’t sure what to expect, but with equity markets falling around 8% in the last month – if bonds can’t pick a bid up out of that, I am really not sure what can. Typically investors run to the safety of bonds during market turmoil, but that doesn’t seem to be happening right now.

All this means for a mortgage broker that we could be seeing higher rates coming on the fixed side. If the stock markets reverse course and head up, it should or could generate some selling in bonds ( prices down, yields up ) . I know everyone is primed for the Spring market, but with the listings piling up quickly, especially in the condo space, potential buyers are going to have an absolute shit load of properties to choose from. While prices are starting to head down every so slowly, the rates may creep up enough on he fixed side to offset those price reductions. Of course, we can never rule out what a new government could bring to the table in terms of incentives, rebates, and rule changes. The old is out, the new is in, and the election is coming. The next PM has a lot of experience with central banking, interest rates, QE, housing market bubbles, and is probably more likely than any PM to try and get housing going again. Mr. Carney presided over the BOC during a time of relentless housing price growth. He knows what increased equity levels can do for a country, and that country’s finances. If ever you wanted the housing market to rip – the guy to make it happen is now in the right seat.

Whenever a politician is campaigning for their job, expect fast and furious rule changes. An election call could be right around the corner, and then DJT may not be the only one changing the rules of the game every day. Tariffs may be on again – off again, interest rates may move intra day more than they used to in an entire quarter, and the news cycle is enough to give you whiplash. Now imagine how much more complicated it is for your client that knows nothing about our world. More than ever your client needs you to be their island in a sea of financial bullshit. They need you to hold their hand to get them through the bad days, and celebrate the good days.

I am world of fighting politicians, squabbling countries, name calling, finger pointing, and general BS, be a trusted resource, and you will come out on top.