Europe's woes are providing an opportunity to raise money at rock-bottom interest rates for Canadian borrowers, with Canada Mortgage and Housing Corp. expected to sell $3-billion or more in debt next week to investors sideswiped by Brexit and the impact of central bank stimulus programs.
CMHC, a Crown corporation, backs its $520-billion mortgage insurance portfolio through borrowing that includes the triple-A rated Canada Mortgage Bonds program.
A report from Desjardins Securities predicts that as early as next Tuesday, CMHC will issue at least $2-billion worth of new 10-year Canada Mortgage Bonds and $1-billion of five-year floating rate debt.
"We expect both tranches to meet with good demand and sell well," said Jean-François Godin, principal analyst at Desjardins.
He pointed out that the global pool of triple-A rated entities has shrunk considerably over the past few years, with Britain the latest borrower to be downgraded in the wake of the vote to leave the European Union, and Australia also expected to lose its coveted triple-A rating.
"This universe gets even smaller after removing smaller and less liquid markets (Denmark, Norway, Sweden and Luxembourg, for example) and drops to just a few names when only accounting for markets with positive yields," the Desjardins analyst said.
Recent data from Statistics Canada and the International Monetary Fund show foreign investors are increasing their holdings of Canadian dollar-denominated debt. The Bank of England and European Central Bank have stepped up economic stimulus efforts recently with programs that include buying government debt as part of quantitative easing (QE). Mr. Godin said: "The global stock of tradeable sovereign debt is depleting amid QE-related purchases by some central banks, a phenomenon that we believe should eventually help Canada Mortgage Bonds."
If the CMHC does issue debt next week, it will be taking advantage of relatively attractive interest rates, as the premium or spread paid by government entities and provincial borrowers compared with benchmarks has narrowed in recent months, as a result of strong investor demand.
There are $2.25-billion of 10-year Canada Mortgage Bonds currently outstanding and that debt pays 1.9 per cent interest; Desjardins predicts the new bonds will feature approximately the same interest rate, although bond investors will push for every basis point of extra interest. (There are 100 basis points in a percentage point.) The CMHC's floating rate notes are currently paying an interest rate that is 17.5 basis points over the benchmark Canadian government three-month rate, known as CDOR, which works out to 1.07 per cent interest.