Friday, December 12, 2008

Canadian mortgage bonds still selling

From the Globe & Mail Streetwise blog:

Government-backed mortgage bonds continue to sell like hotcakes in Canada, against a backdrop of central bank warnings on the state of residential real estate.

Canada Housing Trust rolled out another of its routinely massive bond issues on Thursday, selling $8-billion of five-year debt.

The latest Canada Mortgage Bond pays a 2.7 per cent interest rate and was priced to give investors a yield of 2.747 per cent. That's a premium of 59.5 basis points to the comparable government of Canada bond.

As usual, a cast of thousands led the deal, with TD Securities, RBC Capital Markets, BMO Capital Markets and Scotia Capital sharing the honours.

Investors are clearly relying on the federal government's backing of this debt. Mortgage bonds should be paying higher rates, to reflect additional risk, after the Bank of Canada popped out a report Thursday that said: "With household balance sheets under pressure from weak equity markets, softening house prices, slowing income growth, and record-high debt-to-income ratios, a severe economic downturn could result in a substantial increase in default rates on household debt."

In other fixed income news, the province of Ontario sold another $700-million of real returns bonds that come due in December, 2036. TD Waterhouse said in a report Friday that the debt was priced to provide a real yield of 3.25 per cent, and that the total outstanding amount of this issue is now $2.199-billion.

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