Canada’s central bank has finally stopped juicing the mortgage market… or at least it’s taking a break. Bank of Canada (BoC) data shows December was the first ever drop in the amount of Canada mortgage bonds (CMBs) held. It’s too early to tell if it’s just temporary, or if it’ll start again. If the buying is actually past peak, it could mean cheap mortgage cash might be more difficult to come by soon.
Canada Mortgage Bonds (CMBs)
I’ll spare you the full explanation for the umpteenth time, but let’s go over the basics if you need a refresher. Lenders originate mortgages, pool them, then sell the pool as mortgage backed securities (MBS) to the government. To pay for the MBS, the government sells Canada Mortgage Bonds (CMBs) to investors for the funds. The cash flow from the MBS is used to pay investors that bought the CMBs. To be blunt, CMBs are a state-backed security for financing mortgages.
Government backed securities are very secure, especially in advanced economies like Canada. That security means investors are generally willing to accept a smaller return. Still, it functions as any market should. When demand falls, interest paid rises as an incentive to get more investors. When demand rises, interest paid falls, as the market becomes more competitive. The free market manages risk very well this way, but that all breaks when the state becomes the market.
When real estate sales slowed in 2019, the BoC decided to buy CMBs on a non-competitive basis. You know, for no reason at all. This functioned as a cap on rates, preventing them from rising too much. When the pandemic started, they began buying them on a competitive basis. Investors competed with the central bank’s unlimited capital, for lower returns. The BoC actively drove rates lower. This contributed to flooding the market with cheap mortgage debt. Yes, the market is even cheaper than rock bottom interest rates would typically support. In October they said they would halt the program, but it wasn’t until December that we saw the balance fall.
Balance Of CMBs Falls For The First Time Ever
The BoC has finally shown a monthly decline in the amount of CMBs they held. Central bank disclosure shows they held $9.66 billion in CMBs on Dec 30, 2020. This is a small uptick of 0.02% from the week before, but a monthly decline of 0.65%. Of course, the annual increase is still a whopping 1,803.13% from a year before.