For The First Time Ever, Bank Of Canada Buys Mortgage Bonds

Three weeks ago we reported that, the Bank of Canada announced for the first time that in order to prop up the sliding Canadian housing market help increase the tradeable float of its benchmark securities, the central bank would start buying government-backed mortgage bonds, also known as Canada Mortgage Bonds which are guaranteed by Canada Mortgage and Housing Corp.

Well, it took less than a month for the BoC to execute on its intentions, because on Thursday, the central bank purchased Canada Housing Trust bonds for the first time ever, scooping up C$250 million ($187 million) of the federal agency’s C$5.5 billion five-year notes which priced today.

Canada Housing Trust, the special issuer of Canada Mortgage and Housing Corp.-backed debt, priced the 2.55% bonds due 2023 at a spread of 40.5 bps over comparable debt issued by the country’s federal treasury, National Bank Financial, the lead coordinator of the deal, said. The housing agency first offered these notes in September at a relatively narrow spread of only 31.5 basis points.

As we reported at the time, the Bank of Canada said in late November it would broaden the range of high quality assets it acquires to include purchases of government-guaranteed debt issued by federal Crown corporations. While the central bank said the expansion is "only for balance sheet management" and would give it added flexibility to offset the continued growth of bank notes, the cynical skeptics immediately accused the BoC of implicitly stepping in to prop up Canada's deteriorating housing market.

The expansion, the BoC said, would also provide more freedom to reduce its participation in primary Canadian government bond auctions and help boost the tradeable float, supporting secondary market liquidity. Of course, if that's the real reason, one wonders why it took the BOC ten years since the launch of global QE to expand its operation, instead of waiting until Canada had tumbled to 37th place in the latest global ranking of housing markets from commercial real estate firm Knight Frank, from fourth place in the same survey a year earlier, amid a sharp slowing in Canada's housing market...

... coupled with the biggest annual drop in the biggest regional housing bubble, Vancouver, which just suffered its biggest annual decline since 2009.

Meanwhile, the BOC stepped in at just the right time: today’s deal marks the completion of Canada Housing Trust’s funding plan for the year. The agency has an issuance limit of C$40 billion ($30 billion) for 2018, and after today’s deal it has already priced C$39.75 billion of new bonds. In other words, courtesy of the central bank, not a concern is in sight, although one can't help but recall that just last week the BoC said it would step in only if investor demand did no meet issuance standards. Which begs the question: what would have happened had the BOC not stepped in to complete "investor" demand for the new issue?

And now, considering that the Canadian housing market is suddenly sliding while household insolvencies and bankruptcies are soaring, we wonder if next on the BoC's "shopping list" will be overdue credit card bills and second-lien mortgages.