Carney May Delay Interest Rate Boost on Slow U.S. Recovery: Canada Credit

The Bank of Canada will keep its policy rate unchanged until the second quarter as economic growth slows, according to a Bloomberg News survey that also showed bond-yield forecasts were cut for a fourth month.

The central bank didn’t raise rates Oct. 19 after three prior increases and won’t act again until the April-June period, compared with the earlier forecast of a first-quarter increase, the survey showed. Canada’s three-month treasury bill will yield 1 percent at year-end, down from 1.1 percent in last month’s survey, to match the Bank of Canada’s overnight target for loans between commercial lenders.

Governor Mark Carney, 45, has said there are limits to how far Canada can diverge from the U.S., where the Fed said on Nov. 3 it plans to buy an extra $600 billion of Treasuries to support the recovery. The so-called quantitative easing may not benefit Canada much because it’s pushing up the Canadian dollar and making goods more expensive abroad, said Paul Ferley, assistant chief economist at Royal Bank of Canada.

“To the extent the Bank of Canada shares that concern about slowing growth it’s a reason to delay hiking rates,” Toronto-based Ferley said.

The 10-year government bond yield will be 2.83 percent on Dec. 31, according to the median of 20 estimates gathered Nov. 4-11. The last survey called for a 3 percent yield by the end of the year. The 10-year bond yield was 3.02 percent on Friday.

“The longer and larger Fed QE becomes, the further the Bank of Canada probably extends its policy pause,” Michael Gregory, senior economist at Bank of Montreal in Toronto, wrote in a Nov. 12 note to clients. “Government of Canada bond yields should decrease in the wake of declining U.S. Treasury yields.”

Factory Decline

Investors are betting the Bank of Canada will keep interest rates unchanged until mid-2011. The rate on the six-month overnight index swap was 1.10 percent on Nov. 12, and the nine- month security’s was 1.17 percent. Investors are also betting 10-year bond yields will be 3.13 percent in December, according to futures contract trading on the Montreal Exchange Nov. 12.

Elsewhere in credit markets, the extra yield investors demand to hold the debt of Canada’s corporations rather than its federal government narrowed on Nov. 12 to 135 basis points, or 1.35 percentage points, from 138 the day before and 141 a week earlier, according to Bank of America Merrill Lynch data. That’s the narrowest so-called spread since May.

Relative yields on U.S. corporate bonds ended last week at 175 basis points, from 176 the week before, the Merrill data showed. Global corporate spreads were 167 basis points, two basis points wider than the previous week. Canadian corporate bonds have lost investors 0.6 percent this month, compared with declines of 0.1 percent for U.S. company debt and 0.2 percent for global corporates.

Provincial Bonds

In provincial bond markets, relative yields ended last week at 51 basis points, from 53 basis points the week before and matching the tightest spreads since April. Spreads have dropped from as wide as 71 basis points over federal benchmarks on May 21, when concern about debt levels in Europe was at a peak.

Provincial and municipal bonds have lost 1.3 percent this month, compared with a loss of 0.9 percent for U.S. municipals.

Canada will auction C$1.4 billion in 30-year bonds on Nov. 17. The 4 percent bonds will mature in June 2041. The previous auction of 30-year bonds, on Sept. 1, drew an average yield of 3.489 percent and a bid-to-cover ratio of 2.27.

30 Years

The benchmark 30-year yield rose 14 basis points last week, or 0.14 percentage points, to 3.63 percent. The price of the 5 percent security due in June 2037 dropped C$2.79 during the five days to C$123.30.

Canada’s 30-year bonds yielded 65 basis points below the equivalent maturity U.S. security, compared with an average of about 6 basis points over the last decade, according to Bloomberg data.

Gross domestic product grew at a 1.6 percent annualized pace in the third quarter, according to the median of 20 responses, less than the 2.1 percent estimate taken last month.

“It’s not just trade that has slowed,” said Avery Shenfeld, chief economist at CIBC World Markets in Toronto. “Domestic demand seems to have slowed, and the housing market, from a boom in the first half of the year.”

===============================================================
                    3Q      4Q      1Q      2Q     Avg.    Avg.
                   2010    2010    2010    2011    2010    2011
===============================================================

GDP annualized     1.6%    2.4%    2.5%    2.7%    3.0%    2.4%
 Previous survey   2.1%    2.5%    2.6%    2.4%    3.1%    2.5%
---------------------------------------------------------------
Jobless rate       8.0%    7.9%    7.9%    7.8%    8.1%    7.8%
 Previous survey   8.0%    7.9%    7.9%    7.8%    8.0%    7.7%
---------------------------------------------------------------
CPI YOY%           1.8%    2.0%    2.1%    2.1%    1.7%    1.9%
 Previous survey   1.9%    1.9%    1.9%    2.1%    1.7%    1.9%
===============================================================


                    3Q      4Q      1Q      2Q      3Q      4Q
                   2010    2010    2011    2011    2011    2011
===============================================================
Overnight Rate    1.00%   1.00%   1.00%   1.00%   1.50%   2.00%
 Previous survey  1.00%   1.00%   1.00%   1.50%   1.75%   2.00%
---------------------------------------------------------------
Three-month bill  1.25%   1.00%   1.18%   1.33%   1.69%   1.98%
 Previous survey  0.93%   1.10%   1.20%   1.45%   1.75%   2.10%
---------------------------------------------------------------
Two-year note     1.38%   1.48%   1.62%   1.83%   2.20%   2.53%
 Previous survey  1.40%   1.60%   1.75%   2.00%   2.25%   2.58%
---------------------------------------------------------------
Ten-year bond     2.76%   2.83%   2.90%   3.10%   3.40%   3.53%
 Previous survey  2.93%   3.00%   3.15%   3.40%   3.55%   3.70%
---------------------------------------------------------------
30-year bond      3.36%   3.50%   3.60%   3.68%   3.80%   3.95%
 Previous survey  3.50%   3.53%   3.65%   3.90%   4.00%   4.10%
===============================================================

Canadians comfortable with their mortgage debt levels

One third have made additional payments in the last 12 months
Canadian Association of Accredited Mortgage Professionals releases
Annual State of the Residential Mortgage Market in Canada report
Toronto, ON (November 8, 2010) – Canadian homeowners are comfortable with their
mortgage debt, have significant home equity and could withstand an increase in their mortgage
interest rate, according to the sixth Annual State of the Residential Mortgage Market report from
the Canadian Association of Accredited Mortgage Professionals (CAAMP), released today.
Highlights:
• The vast majority of Canadians with mortgages are able to afford at least a $300
increase in their monthly mortgage payments.
• One in three (35 per cent) mortgage holders have either increased their payments or
made a lump sum payment on their mortgage in the last year.
• 89 per cent of Canadian homeowners have at least 10 per cent equity in their homes
and 80 per cent have more than 20 per cent equity.
• Overall home equity is at 72 per cent of the total value of housing in Canada; for
homeowners who have mortgages, equity level averages 50 per cent.
• As of August 2010, there was $1.01 trillion in outstanding residential mortgage credit in
Canada, an increase of 7.6 per cent from last year.
“Canadians are being smart and responsible with their mortgages,” said Jim Murphy, AMP,
President and CEO of CAAMP. “They are building equity in their homes and making informed,
long-term mortgage decisions. The survey results speak to the strength of our mortgage market,
especially when compared to the United States.”
Homeownership is a good long-term investment. Most Canadians agree that buying a home is a good long-term investment and are focused on their mortgages to support that investment. Many mortgage holders are making voluntary additional payments: 16 per cent have increased monthly payments during the past year, 12 per cent have made lump sum payments, and 7 percent did both.
Canadians are exercising caution when taking out their mortgages, with a majority choosing a
fixed-rate (66 per cent). A five-year fixed-rate mortgage remains the most popular option in
Canada. Despite the fact that variable rate mortgages have become much less expensive
compared to fixed rates, the majority choice is still fixed rates: this decision is based on people’s
individual assessments of risk, not just the cost difference. Potential rate increases won’t be a problem.
The CAAMP study found that a vast majority of Canadians have significant capabilities to afford
higher payments if and when mortgage interest rates rise. 84 per cent report that they could
weather an increase of $300 or more on their monthly payments.
Most of the people who have low tolerances for increased payments have fixed rate mortgages,
by the time their mortgages are due for renewal, their financial capacity will have expanded and
their mortgage principal will have been reduced.
Also, Canadians have been able to negotiate better than posted mortgage interest rates. For
five year fixed rate mortgages arranged in the past year, the average rate is 4.23%, which is
1.42 points lower than typical, advertised rates.
Of the 1.4 million Canadians who renewed their mortgage in the past year, 72 per cent were
able to renegotiate a decreased rate: on average, rates are 1.09 percentage points less than the
rates prior to renegotiating.
Canadians have significant equity in their homes, strengthening the housing market Canadians’ home equity is impressively high. Among homeowners who have mortgages, the
average amount of equity is about $146,000, or 50 per cent of the average value of their homes.
The amount of equity take-out in the past year is unchanged from last year with around one in
five homeowners, or 18 per cent, taking equity out of their home, at an average of $46,000. The
most common purpose for equity take-out is debt consolidation and repayment (45 per cent)
followed by home renovations (43 per cent), purchases and education (19 per cent) and then
investments (16 per cent).
The report is authored by CAAMP Chief Economist Will Dunning and based on information
gathered by Maritz Research Canada in a survey of Canadian consumers conducted in October