Posted on March 8, 2011
March 7 (Bloomberg) -- The difference between yields on Canada’s five-year government bonds and mortgage rates offered by the nation’s banks has narrowed to about the least in four years as lenders absorb higher borrowing costs to try to increase their share of the country’s surging mortgage market.
The spread between bond yields and the Bank of Canada’s index of five-year conventional mortgage rates shrank to 2.68 percentage points on March 4, from a recent high of about 5.15 in January 2009, according to data compiled by Bloomberg. The current spread means borrowers are paying about one-half of a percentage point less on a five-year fixed mortgage rate than they would otherwise if the gap was at its average.
The tighter spreads reflects the health of
“When everyone’s trying to compete for the same loan, that compresses margins within the banks,” said Craig Fehr, a bank analyst at Edward Jones & Co. in
Average Rates
The average posted rate for a mortgage in
The spread between the average
Elsewhere in credit markets, relative yields on
Canadian building permits unexpectedly fell in January, according to Ottawa-based Statistics Canada. The total value of permits issued by municipalities decreased 5.1 percent to C$5.37 billion. It was the third drop in four months.
Relative Yields
The extra yield investors demand to own the debt of Canadian investment-grade corporations rather than the federal government shrank 1 basis point to 124 basis points, or 1.24 percentage points, Bank of America Merrill Lynch indexes show. Yields jumped to 4.01 percent from 3.94 percent on Feb. 25.
Canadian corporate bonds have gained about 0.2 percent this year, compared with a loss of 0.9 percent for Canadian government bonds and a return of 0.33 percent for company debt securities globally, according to Bank of America Merrill Lynch data.
In the provincial bond market, relative yields also shrank 1 basis point, to 51 basis points on March 4. Yields were 3.46 percent, up from 3.40 percent on Feb. 25. The securities are down 0.9 percent this year.
Canada’s dollar rose for a third week against the U.S.’s currency as crude oil, the nation’s biggest export, surged on concern unrest in Libya will spread to other North African and Mideast nations and curb shipments.
‘Very Resilient’
The loonie, as the Canadian currency is known for the image of the aquatic bird on the C$1 coin, appreciated 0.4 percent to 97.34 cents per U.S. dollar, from 97.74 on Feb. 25. It touched 96.84 cents on March 1, the strongest level since November 2007. One Canadian dollar purchases $1.0273.
“The Canadian dollar is still very resilient,” said George Davis, chief technical analyst for fixed income and currency strategy at Royal Bank of
Canadian 10-year bonds fell for the first time in three weeks, pushing the yield on the benchmark up four basis points, or 0.04 percentage point, to 3.33 percent. The price of the 3.50 percent note maturing in June 2020 slid 33 cents to C$101.14.
Employers likely added 25,000 jobs in February after an increase of 69,200 in the previous month, according to the median forecast of 23 economists before Statistics Canada’s March 11 report. The unemployment rate may have decreased to 7.7 percent, from 7.8 percent.
Home Prices
Canadian home prices have increased by 15 percent over the last two years after dropping about 9 percent between August 2008 and April 2009, according to the Teranet-National Bank House Price Index. By contrast,
Canadian mortgage debt has reached a record share of the country’s private credit market as households continue to boost loans while companies remain reluctant to borrow cash.
The CHART OF THE DAY shows about 38 percent of private debt consisted of mortgages at the end of 2010, according to
“The markets are very competitive in terms of all areas of lending,” Toronto-Dominion Chief Financial Officer Colleen Johnston said in a telephone interview. “We’re seeing that competition intensify.”
Economic Growth
“This is a very competitive market,” Bank of Montreal Chief Executive Officer William Downe said in a March 1 telephone interview. “There are plenty of big players in the market, and I would say that the level of competition is at parity with the general state of this market.”
In the fiscal first-quarter, lenders including Royal Bank, Canadian Imperial Bank of Commerce and National Bank of
“I’ve never seen a more competitive marketplace,” David McKay, Royal Bank’s head of Canadian banking, told reporters on March 3. “I’d say our strategy is to grow profitable market share, and not every competitor would do that, I would think.”
The net interest margin at CIBC, the country’s fifth- largest bank, narrowed to 1.8 percent from 1.83 percent in the previous quarter, while No. 6 National Bank reported a margin of 2.45 percent, narrowing from 2.48 percent three months earlier.