Canada’s central bank is still buying tens of million of mortgage bonds. Bank of Canada (BoC) data shows the balance of Canada Mortgage Bonds (CMBs) they hold, increased this week. The increase is a couple of weeks after the pandemic program to buy these has ended. However, it appears that didn’t mean they were going to stop buying them entirely.
Canada Mortgage Bonds
We’ve talked about Canada Mortgage Bonds (CMBs) quite a bit, but if you missed it – here’s a quick intro. 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 CMBs to investors for the funds. The cashflow from the MBS is used to pay investors that bought the CMBs. Therefore, CMBs are a state-backed security for mortgage financing in Canada.
Government backed securities are usually very secure, so they don’t pay investors much. When investor demand rises for CMBs, interest paid falls. If demand falls, interest paid rises. Pretty straight forward, except when the country’s central bank becomes the investor. In this case, the activity of the BoC helps put a ceiling on rates, and can actively drive them down.
Last year, when real estate sales slowed without an obvious reason, the BoC decided to buy CMBs. It was for, uh… totally unrelated reasons, of course. They bought them on a non-competitive basis, which means they didn’t bid against other investors. This capped rates from rising. At the start of the pandemic, they began buying them on a competitive basis. This actively drove down rates, as they competed with investors.
Rates are supposed to rise in periods of turmoil, as a form of risk management though. You don’t want people borrowing more when things are getting worse. However, when the BoC drove rates lower – that’s exactly what happened. Real estate sales hit record volumes, while mortgage rates fell to record lows. The BoC blamed borrowers for borrowing, and then announced they would end the program on Oct 26. Except, the balance of assets are still rising.
BoC Mortgage Bond Balance Up 1,748%
The balance of CMBs held by the BoC is still rising fairly fast, even post “end” of program. The balance held reached $9.722 billion on Nov 11, up 3.45% from a month before. The increase works out to a 1,748.10% rise from the same week last year. If that sounds like an absurdly large increase, that’s because it is.
Canada Mortgage Bonds (CMBs) Held By The BoCThe dollar value of Canada Mortgage Bonds held as assets by the Bank of Canada, in millions of dollars. Source: Bank of Canada, Better Dwelling.
BoC Mortgage Bond Balance Increased $122 Million After Program Ended
The program was supposed to end in October though, right? Well, on October 28th, two days after it officially ended, the balance was $9.601 billion. The balance has increased about $122 million, or about 1.26% from then. That’s still a fairly aggressive increase, despite the end of the program.
Now, this may answer one of the questions that was lingering – the program ended, but buying didn’t. In other words, they’re still working to keep rates from rising to some degree. They just aren’t buying on a competitive basis, to try to drive them lower.
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