Thanks Europe & Asia

Canadian-Mortgage-Bonds The market for Canada Mortgage Bonds (CMBs) has jumped to over $189 billion today from less than $10 billion in 2001, and foreigners love ‘em.

Foreign investors love CMBs so much, they bought 37% of last week’s issuance. (25-30% is normal.)

“All kinds of new names are becoming interested in Canada and specifically in housing bonds,” BMO economist Doug Porter told Bloomberg.

This international zeal for our debt has benefits. Most notably, it shrinks the risk premium (spreads) that investors demand from CMBs—when compared with AAA government bonds of the same maturity.

This, in turn, saves Canadians some basis points off their mortgage rates.  It’s tough to quantify how much higher spreads would be without foreign buying, but let’s call it 10 basis points for conversation.  Ten basis points on a $200,000 mortgage buys about 80 coffees a year—not enough to retire on, but enough to say: “Thanks Europe & Asia.”

  1. Almost every Money Market fund in Canada already owns CMBs, so why not every Money Market fund in the world???
    All the power is in the same place…. the same companies offering people a useless negative return on their cash savings (after inflation and MER) are the same ones that are supporting the securitization of mortgages and helping to inflate the housing market with cheap loans.
    So, they buy these CMBs, which helps inflate the housing market, which leads to bigger and bigger mortgages, which makes house buyers more and more dependent on cheap loans, which drives even more supply of the bonds that come from those cheap loans.
    So, what happens when there simply aren’t enough home buyers out there to take out big mortgages and ultimately supply these bonds? The sub-20% downpayment / 25-year+ mortgage market can’t keep growing indefinitely, can it?

  2. deja vu for our american friends… wasn’t this the start of the housing bubble? albeit with a big difference – CMBs are backed by Government of Canada… equivalent to Fannie & Freddie bonds…
    i would love to know if the underlying MBS and loans in the recent CMB issues are similar to CMBs issued 2 years ago.

  3. Leading up to the financial crisis of 2008, it was the wild wild west in the U.S. when it came to residential mortgages. While it’s true that CMHC holds the bulk of the risk on all insured mortgages in Canada, our qualification criteria is much more strict. In the U.S., some lenders were going up to 135% LTV with no down payment or proof of income. This sort of radical financing never happened here. The only threat to the Canadian market, in my view, are the fundamentals of the economy of which housing prices is a by-product of. With the Canadian economy slowing down (thanks in part to the U.S. and Europe) and unemployment creeping up, housing prices will undoubtedly cool off. But I don’t believe it’s going to be pure pandemonium. There will be losses, there will be an increase in power of sales and foreclosures, but not in the same severity as it’s happening now across the border.

  4. Why don’t we ever thank the U.S. for our growth over the past 10 years? We’re always so eager to blame them for our economy slowing down but never credit their demand for our resources during the early, mid and late 2000’s for our growth. And since their economy has slowed down we created our own growth by piling on massive amounts of household debt. So where to from here? Only time will tell.

  5. CMBs aren’t inflating the housing market. CMB funding actually costs more than balance sheet funding. If your position is that low rate mortgages are ruining the Canadian dream then blame the banks if anything. Either way it’s a ludicrous argument.
    By the way, the average Canadian mortgage is $143,000 according to this website. I wouldn’t exactly call that “big.”

Your email address will not be published. Required fields are marked *

Copy link