John Shmuel, Financial Post
Canada's housing market is expected to cool off this year and next, but isn't at risk of falling victim to a U.S.-style foreclosure crisis anytime soon, according to a new report by debt-rating firm DBRS Ltd.
DBRS said in the report that Canada will continue to fare well in comparison to its neighbour to the south when the Canadian housing market corrects itself and interest rates are tightened. That is because lending practices here are much more sound than in the U.S.
"The likelihood of us having the kind of situation they had in the U.S. is extremely low," said Jerry Marriott, managing director of structured finance at DBRS . "It's a combination of the lending practices prior to the peak in 2007 - they were more restrained, so there were better underwriting practices in Canada. We also think there are a number of factors in the Canadian market which have lent themselves to more prudent lending."
Those factors includes less aggressive lenders in the market, as well as systems designed to keep people paying their mortgages.
Mr. Marriott said that a cooling effect is gradually taking hold in the housing market as credit availability begins to tighten, and the HST factors into home buying decisions in Ontario and British Columbia.
That means there's a greater likelihood this year that there will be a correction in housing prices rather than a continued increase. Mr. Marriott said the DBRS expects the market to cool throughout the year and continue to cool into 2011. That echoes analysts expectations, who also expect prices to drop as well. A recent report by TD Bank predicts prices will fall by 2.7% in 2011.
"If you add up the factors you would look at as to whether there's going to be further price increases or the potential for a correction, we don't see there's a lot of factors supporting further price increases," Mr. Marriott said. "But there are a number of factors that show there might be some moderation in housing prices."
That may bode well for potential buyers after a report by CIBC this week said that on average, Canadian home prices are currently 14% over their "fair" value - that represents about 1.5 million homes, or 17% of all dwellings.
The report also highlights that Canadian households continue to have a particularly high level of debt, something that the DBRS notes is part of an ongoing trend. But it tempers that by adding that household debt is not as worrying as some analysts have suggested.
"We think the measurement of household leverage is subject to a fair amount of interpretation," said Mr. Marriott.
For instance, the debt-to-disposable income shows Canadians are generally more indebted than Americans - however, the report outlines that this doesn't reflect certain differences between the two countries that affect income, such as the fact that the U.S. has lower taxes but that Americans pay more money toward their health-care bills.
"At the end of 2009, Canadian households remained financially less leveraged by 10% to 45% compared with U.S. households," the report said. Overall, after adjustments, Canada had a household liabilities-to-total gross income ratio of 116.8% at the end of 2009, while the United States's ratio was 161.5%.
But Canadian household debt is growing faster. Household liabilities increased by 29.5% in Canada between 2007 and 2009. In the use, household debt grew just 5.3% during the same period.
Overall, mortgage lending in Canada reached $958.8 billion at the end of 2009. That's more than double the $414.1 billion ten years ago. When including home equity lines of credit, outstanding mortgage-related credit was more than $1 trillion.
Monday, May 31, 2010
Friday, May 28, 2010
Do you need $1 million for a comfy retirement?
by Diana Cawfield, Bankrate.com
Wednesday, May 19, 2010
When it comes to retirement, there is no shortage of opinions on the need for a hefty $1 million to carry you through your golden years. The demographic trend of living longer and more actively also means extending our financial lives, so suggestions of needing plumper nest eggs are common. Outliving our money is a big concern for many.
While a six-digit portfolio may be the target to meet the lifestyle choices of some people, there are more modest and more achievable financial targets for many others. If you are in the lifestyle camp that requires close to $1 million to retire, and you're comfortable with that, both financially and personally, this article is not for you.
But if you are among the many other investors who will retire with far less than a million dollars, read on to find out how to make your funds last a lifetime.
Retirement less expensive than you think
According to Malcolm Hamilton, a consulting actuary with Mercer, in Toronto, we don't read about the comfortable retiree a lot because it doesn't fit the stereotype. "The stereotype," he says, "is the extravagant lady spending, the impoverished senior or the poor boomer in the sandwich generation having to help the poor senior."
Yet, people who are frugal - not miserly, notes Hamilton - and don't like wasting money often find that they don't spend anywhere near as much as they have saved.
It's all based on what you're used to. According to Hamilton, many people don't increase their spending once they retire because they're already doing what they like and it doesn't cost them very much. "It becomes obvious when they're 10 to 15 years into retirement that they're just getting richer and richer, not poorer and poorer," he says.
Hamilton points out that retirement offers a host of enjoyable, low-cost activities that include local community centres, subsidized courses and discounts on clubs and recreation. Then there's a wide choice of free or affordable activities like walks in the park, playing cards with friends, or reading and watching television for armchair adventures.
The rule of $20
Other positive factors bode well for retiring with more modest means. "Canadians tend to be very conservative about their approach to finances anyway, and our banking system has certainly helped that and it's given retirees right now a greater piece of mind," says Patricia Lovett-Reid, senior vice-president at TD Waterhouse Canada.
In fact, according to her research, close to 70 per cent of Canadian retirees already say their retirement is exactly, or mostly, what they expected. "It's the preretirees who worry about their retirement, because they're not sure how much they're going to need. So when they hear that you need a million dollars, it's overwhelming."
Lovett-Reid credits Russell Investments Canada for the helpful retirement Rule of $20. Essentially, for every dollar of annual income that you expect to need during your retirement, you need to have saved $20 by the time you retire, without inflation indexing.
For example, a couple heading into retirement with $400,000 of registered savings can expect it to generate $20,000 a year in retirement income. "Now, you combine that with an estimated $25,000 of Canada Pension Plan, or CPP, and Old Age Security, or OAS, and this couple is looking at a yearly retirement income of approximately $45,000," says Lovett-Reid.
For illustrative purposes, Lovett-Reid says research from Statistics Canada indicates that the median household income for a married couple is $63,000 gross. Therefore, if you want to maintain, say, 70 per cent of that income, then a couple at age 65 would need just shy of $45,000 a year in retirement, pretax.
For individuals who fall short of a $400,000 portfolio - especially those with no company pension - you're going to require $20,000 of income from your own savings a year to maintain close to that $45,000 in annual income.
"So you're going to have to look at the co-mingling of all your income sources - registered retirement savings, tax-free savings accounts and nonregistered accounts," says Lovett-Reid.
Three job descriptions in retirement
According to Keith Pangretitsch, director of national sales at Russell Investments Canada, to simplify the process of calculating income needs, "we always say every dollar a client has should have a job description."
To that end, he earmarks three main job descriptions for retirement funds. The first is to cover essentials such as food, shelter, transportation expenses, taxes and any other expenses beyond your control.
The second job description, lifestyle, offers flexibility because it is a discretionary expense. You can choose how to use your money when it comes to entertainment, travel, clothing and eating out, along with many other lifestyle choices.
That's not to say that controlling discretionary expenses is an easy task. "I'll put out an economics terms from my university days: We're all utility-maximizing individuals. We all want to do more than less," says Pangretitsch. So, you need to choose investments that will produce the amount of money you need.
While individuals vary greatly in risk tolerance and financial circumstances, a portfolio that offers a balance between risk and return is often necessary to generate growth of capital in retirement. "What we recommend is 60 per cent equity and 40 per cent fixed income to give you the growth that you need and to reduce the risk from equities," says Pangretitsch.
The third job description is planning. "Most people, quite frankly, start planning too late," says Pangretitsch. "I think the regulatory environment is good for folks to retire well, but we also need that added piece of financial planning to ensure that we're on track. Retirement is far too complicated, with tax issues and reduced income issues, not to take it seriously."
Wednesday, May 19, 2010
When it comes to retirement, there is no shortage of opinions on the need for a hefty $1 million to carry you through your golden years. The demographic trend of living longer and more actively also means extending our financial lives, so suggestions of needing plumper nest eggs are common. Outliving our money is a big concern for many.
While a six-digit portfolio may be the target to meet the lifestyle choices of some people, there are more modest and more achievable financial targets for many others. If you are in the lifestyle camp that requires close to $1 million to retire, and you're comfortable with that, both financially and personally, this article is not for you.
But if you are among the many other investors who will retire with far less than a million dollars, read on to find out how to make your funds last a lifetime.
Retirement less expensive than you think
According to Malcolm Hamilton, a consulting actuary with Mercer, in Toronto, we don't read about the comfortable retiree a lot because it doesn't fit the stereotype. "The stereotype," he says, "is the extravagant lady spending, the impoverished senior or the poor boomer in the sandwich generation having to help the poor senior."
Yet, people who are frugal - not miserly, notes Hamilton - and don't like wasting money often find that they don't spend anywhere near as much as they have saved.
It's all based on what you're used to. According to Hamilton, many people don't increase their spending once they retire because they're already doing what they like and it doesn't cost them very much. "It becomes obvious when they're 10 to 15 years into retirement that they're just getting richer and richer, not poorer and poorer," he says.
Hamilton points out that retirement offers a host of enjoyable, low-cost activities that include local community centres, subsidized courses and discounts on clubs and recreation. Then there's a wide choice of free or affordable activities like walks in the park, playing cards with friends, or reading and watching television for armchair adventures.
The rule of $20
Other positive factors bode well for retiring with more modest means. "Canadians tend to be very conservative about their approach to finances anyway, and our banking system has certainly helped that and it's given retirees right now a greater piece of mind," says Patricia Lovett-Reid, senior vice-president at TD Waterhouse Canada.
In fact, according to her research, close to 70 per cent of Canadian retirees already say their retirement is exactly, or mostly, what they expected. "It's the preretirees who worry about their retirement, because they're not sure how much they're going to need. So when they hear that you need a million dollars, it's overwhelming."
Lovett-Reid credits Russell Investments Canada for the helpful retirement Rule of $20. Essentially, for every dollar of annual income that you expect to need during your retirement, you need to have saved $20 by the time you retire, without inflation indexing.
For example, a couple heading into retirement with $400,000 of registered savings can expect it to generate $20,000 a year in retirement income. "Now, you combine that with an estimated $25,000 of Canada Pension Plan, or CPP, and Old Age Security, or OAS, and this couple is looking at a yearly retirement income of approximately $45,000," says Lovett-Reid.
For illustrative purposes, Lovett-Reid says research from Statistics Canada indicates that the median household income for a married couple is $63,000 gross. Therefore, if you want to maintain, say, 70 per cent of that income, then a couple at age 65 would need just shy of $45,000 a year in retirement, pretax.
For individuals who fall short of a $400,000 portfolio - especially those with no company pension - you're going to require $20,000 of income from your own savings a year to maintain close to that $45,000 in annual income.
"So you're going to have to look at the co-mingling of all your income sources - registered retirement savings, tax-free savings accounts and nonregistered accounts," says Lovett-Reid.
Three job descriptions in retirement
According to Keith Pangretitsch, director of national sales at Russell Investments Canada, to simplify the process of calculating income needs, "we always say every dollar a client has should have a job description."
To that end, he earmarks three main job descriptions for retirement funds. The first is to cover essentials such as food, shelter, transportation expenses, taxes and any other expenses beyond your control.
The second job description, lifestyle, offers flexibility because it is a discretionary expense. You can choose how to use your money when it comes to entertainment, travel, clothing and eating out, along with many other lifestyle choices.
That's not to say that controlling discretionary expenses is an easy task. "I'll put out an economics terms from my university days: We're all utility-maximizing individuals. We all want to do more than less," says Pangretitsch. So, you need to choose investments that will produce the amount of money you need.
While individuals vary greatly in risk tolerance and financial circumstances, a portfolio that offers a balance between risk and return is often necessary to generate growth of capital in retirement. "What we recommend is 60 per cent equity and 40 per cent fixed income to give you the growth that you need and to reduce the risk from equities," says Pangretitsch.
The third job description is planning. "Most people, quite frankly, start planning too late," says Pangretitsch. "I think the regulatory environment is good for folks to retire well, but we also need that added piece of financial planning to ensure that we're on track. Retirement is far too complicated, with tax issues and reduced income issues, not to take it seriously."
Tuesday, May 25, 2010
New rules cuff some mortgages to banks
Garry Marr, Financial Post
A headlock would be the wrestling term to describe the hold Canadian banks will have on some consumers because of new, more strict mortgage rules.
We are already seeing the impact of the changes that came into effect on April 19, but were put in place well in advance by Canadian financial institutions. Consumers are increasingly selecting fixed-rate mortgages of five years or more because it's easier to qualify for them.
On mortgages for terms of four years or less, including variable-rate mortgages, consumers must be able to pay based on the five-year fixed posted rate, which is now 6.1%. Go longer and you can use the rate on your contract, as low as 4.6%. No more than 32% of your gross income can cover principal and interest, property taxes and heat.
Peter Vukanovich, president of Genworth Financial Canada, the largest private provider of mortgage-default insurance, says only 5% of new high-ratio mortgages are going variable versus 15% just six months ago.
But there is another wrinkle to the new rules: Anybody shopping around for a better rate has to requalify based on their current credit situation. Stay with the same bank and there's no check.
"It's definitely a headlock and not a loophole because a loophole you can get out of," says Vince Gaetano, a mortgage broker with Monster Mortgage.
There is a large percentage of Canadians who get a renewal notice from their bank and just sign on the dotted line. The Canadian Association of Accredited Mortgage Professional has found only 22% of Canadians switch banks at renewal time. A significant portion of the remaining 78% are sheep being led around by their financial institutions.
Those looking for some choice may find what was good enough to get into the market a month ago may not meet the test today.
Consider that as recently as two years ago, consumers were able to buy a house with no money down and a 40-year amortization schedule. If that consumer was making regular monthly payments, they would have paid down only 4.7% of their principal after five years. Today, that customer would still be high ratio and subject to requalifying if they switched banks.
"It's not all of them, but a majority of first-time buyers with just 5% down or less won't be able to qualify if they go to another bank," Mr. Gaetano says. Many of those buyers were qualifying based on the three-year rate - about 200 basis points lower than the current qualification rate.
If house prices went down, something many in the real estate community have suggested could happen, that would be an even bigger blow for consumers. It would mean an even larger percentage of homeowners would still be considered high ratio upon renewal because they wouldn't meet the test of having 20% equity in their home.
Marcel Beaudry, vice-president of ING Direct, says there is no question the new rules will have an impact on consumers looking to switch banks, but noted anyone who had a 40-year amortization and changed institutions also had to requalify and there hasn't been a huge impact.
"There will be a segment of the population tied down by the new rules to their bank," Mr. Beaudry says.
That's a position nobody should be in.
A headlock would be the wrestling term to describe the hold Canadian banks will have on some consumers because of new, more strict mortgage rules.
We are already seeing the impact of the changes that came into effect on April 19, but were put in place well in advance by Canadian financial institutions. Consumers are increasingly selecting fixed-rate mortgages of five years or more because it's easier to qualify for them.
On mortgages for terms of four years or less, including variable-rate mortgages, consumers must be able to pay based on the five-year fixed posted rate, which is now 6.1%. Go longer and you can use the rate on your contract, as low as 4.6%. No more than 32% of your gross income can cover principal and interest, property taxes and heat.
Peter Vukanovich, president of Genworth Financial Canada, the largest private provider of mortgage-default insurance, says only 5% of new high-ratio mortgages are going variable versus 15% just six months ago.
But there is another wrinkle to the new rules: Anybody shopping around for a better rate has to requalify based on their current credit situation. Stay with the same bank and there's no check.
"It's definitely a headlock and not a loophole because a loophole you can get out of," says Vince Gaetano, a mortgage broker with Monster Mortgage.
There is a large percentage of Canadians who get a renewal notice from their bank and just sign on the dotted line. The Canadian Association of Accredited Mortgage Professional has found only 22% of Canadians switch banks at renewal time. A significant portion of the remaining 78% are sheep being led around by their financial institutions.
Those looking for some choice may find what was good enough to get into the market a month ago may not meet the test today.
Consider that as recently as two years ago, consumers were able to buy a house with no money down and a 40-year amortization schedule. If that consumer was making regular monthly payments, they would have paid down only 4.7% of their principal after five years. Today, that customer would still be high ratio and subject to requalifying if they switched banks.
"It's not all of them, but a majority of first-time buyers with just 5% down or less won't be able to qualify if they go to another bank," Mr. Gaetano says. Many of those buyers were qualifying based on the three-year rate - about 200 basis points lower than the current qualification rate.
If house prices went down, something many in the real estate community have suggested could happen, that would be an even bigger blow for consumers. It would mean an even larger percentage of homeowners would still be considered high ratio upon renewal because they wouldn't meet the test of having 20% equity in their home.
Marcel Beaudry, vice-president of ING Direct, says there is no question the new rules will have an impact on consumers looking to switch banks, but noted anyone who had a 40-year amortization and changed institutions also had to requalify and there hasn't been a huge impact.
"There will be a segment of the population tied down by the new rules to their bank," Mr. Beaudry says.
That's a position nobody should be in.
Friday, May 21, 2010
But recovery has legs; Bank lending at solid clip in Canada, growth in U.S. credit
Paul Vieira, Financial Post
OTTAWA - Europe is a mess and markets are not thrilled about what they see or hear from the continent's policy-makers, judging by the global sell-off in stocks and commodities.
Still, there is reason to believe the global recovery has legs, even if it moves at a slower pace.
For starters, European uncertainty may slow attempts by Beijing to tighten Chinese credit conditions, which had traders worried about near-term emerging market demand. Bank lending continues at a good clip in Canada, and credit growth in the United States is slowly picking up. Long-term U.S. mortgage rates have moved to near-record lows, and even the sharp drop in crude oil prices, which will take a bite out of Canada's terms of trade, means more money in the pockets of that ever-important U.S. consumer.
"There's a lot of turmoil, but I don't know that I am prepared to throw in the towel and say we will have a big follow-through economic impact," says Stewart Hall, economist at HSBC Securities Canada.
Events in Europe, however, do foreshadow what's ahead -- namely, slower growth for the developed world as it deals with the massive amount of debt built up prior to the financial crisis, and piled on with zest in efforts to avert the next Great Depression.
"In the near term, the Canadian economy will be in healthy shape," says Avery Shenfeld, chief economist at CIBC World Markets. "But we are going to see the story of fiscal tightening hit much more important economic partners for Canada -- like the U.S. and Britain next year -- and that may slow growth more than we would like."
Make no mistake, Europe is a big economic deal. The eurozone, or the countries that use the euro, represents 16% of global gross domestic product.
But even before Europe got itself into trouble -- mostly over the handling of a potential Greek default -- the Bank of Canada had pencilled in weak growth for the economic bloc of just 1.2% this year and 1.6% in 2011.
Further, the eurozone plus Britain accounted for 8.6% of all Canadian exports shipped in the past 12 months.
Nevertheless, Europe's woes are beginning to ripple. The Canadian dollar took a hit and yields on Canadian bonds fell yesterday.
Market participants scaled back expectations of Bank of Canada rate increases on the belief the economy might sputter due to events across the Atlantic.
Douglas Porter, deputy chief economist at BMO Capital Markets, says the Asian crisis of the late 1990s caused "much sound and fury" in North American markets, just as Europe has this week.
But at the end of the day, the U.S. economy "kept chugging through as if nothing had happened," Mr. Porter said.
"Europe is important, but the U.S. economy is big enough to stand on its own. And the more crucial factor, going forward, is if U.S. employment keeps climbing."
One drawback from the euro troubles, though, is the rapid strength of the U.S. dollar.
Much of the anticipated U.S. economic comeback was based on its emergence as an exporting powerhouse by building on a weaker currency and the U.S. propensity to extract productivity gains.
What's got markets spooked is the possibility that Europe's fiscal malaise represents a return to yet another global recession. But credit markets continue to function and interest rates remain near record lows, Mr. Hall says.
"Are we seeing real changes in long-term demand trends? I don't think so," Mr. Hall says.
"That tends to suggest we get a commodity price recovery once markets get their heads around the fact this may not be the great economic development that the sub-prime meltdown was."
OTTAWA - Europe is a mess and markets are not thrilled about what they see or hear from the continent's policy-makers, judging by the global sell-off in stocks and commodities.
Still, there is reason to believe the global recovery has legs, even if it moves at a slower pace.
For starters, European uncertainty may slow attempts by Beijing to tighten Chinese credit conditions, which had traders worried about near-term emerging market demand. Bank lending continues at a good clip in Canada, and credit growth in the United States is slowly picking up. Long-term U.S. mortgage rates have moved to near-record lows, and even the sharp drop in crude oil prices, which will take a bite out of Canada's terms of trade, means more money in the pockets of that ever-important U.S. consumer.
"There's a lot of turmoil, but I don't know that I am prepared to throw in the towel and say we will have a big follow-through economic impact," says Stewart Hall, economist at HSBC Securities Canada.
Events in Europe, however, do foreshadow what's ahead -- namely, slower growth for the developed world as it deals with the massive amount of debt built up prior to the financial crisis, and piled on with zest in efforts to avert the next Great Depression.
"In the near term, the Canadian economy will be in healthy shape," says Avery Shenfeld, chief economist at CIBC World Markets. "But we are going to see the story of fiscal tightening hit much more important economic partners for Canada -- like the U.S. and Britain next year -- and that may slow growth more than we would like."
Make no mistake, Europe is a big economic deal. The eurozone, or the countries that use the euro, represents 16% of global gross domestic product.
But even before Europe got itself into trouble -- mostly over the handling of a potential Greek default -- the Bank of Canada had pencilled in weak growth for the economic bloc of just 1.2% this year and 1.6% in 2011.
Further, the eurozone plus Britain accounted for 8.6% of all Canadian exports shipped in the past 12 months.
Nevertheless, Europe's woes are beginning to ripple. The Canadian dollar took a hit and yields on Canadian bonds fell yesterday.
Market participants scaled back expectations of Bank of Canada rate increases on the belief the economy might sputter due to events across the Atlantic.
Douglas Porter, deputy chief economist at BMO Capital Markets, says the Asian crisis of the late 1990s caused "much sound and fury" in North American markets, just as Europe has this week.
But at the end of the day, the U.S. economy "kept chugging through as if nothing had happened," Mr. Porter said.
"Europe is important, but the U.S. economy is big enough to stand on its own. And the more crucial factor, going forward, is if U.S. employment keeps climbing."
One drawback from the euro troubles, though, is the rapid strength of the U.S. dollar.
Much of the anticipated U.S. economic comeback was based on its emergence as an exporting powerhouse by building on a weaker currency and the U.S. propensity to extract productivity gains.
What's got markets spooked is the possibility that Europe's fiscal malaise represents a return to yet another global recession. But credit markets continue to function and interest rates remain near record lows, Mr. Hall says.
"Are we seeing real changes in long-term demand trends? I don't think so," Mr. Hall says.
"That tends to suggest we get a commodity price recovery once markets get their heads around the fact this may not be the great economic development that the sub-prime meltdown was."
DAY OF DECLINE
John Greenwood, Financial Post In a worrying replay of the crisis of 2008 and 2009, lending rates in Canadian credit markets continued to react to the growing turmoil over European debt, with key overnight bank lending spreads doubling since February.
"We are starting to see interbank lending rates back up again and that's an unfortunate development," said Doug Porter, deputy chief economist at BMO Capital Markets. "We are starting to see investors shun any kind of risky trade again, whether corporate bonds or equities. We are seeing risk aversion right across the board."
While Canada has only modest direct exposure to troubled European countries, like other major economies it is feeling the indirect impact of turmoil in global financial markets sparked by fears of a possible sovereign default.
The early days of the crisis that climaxed early last year were characterized by a steady retreat by lenders from any kind of risk, reflected in steadily rising rates that banks charged each other for short-term loans, which eventually moved so high that interbank lending was effectively halted.
Conditions in Canadian credit markets are still nowhere near where they were in March 2009 at the height of the storm but the widening of spreads in just about every sector is a worrying "echo of what happened," Mr. Porter said.
The comments come after German Chancellor Angela Merkel slapped a ban on the short-selling of certain kinds of stocks and bonds, that sparked anger among other European leaders and sent equity markets into a tailspin as investors concluded the European bailout was unravelling.
The closely watched London Interbank Offered Rate climbed to the highest level in 10 months earlier this week as international banks hoarded money and investors grew more leery of risk.
Meanwhile, a U.S. Federal Reserve governor yesterday warned that the European troubles could spark another financial crisis, with credit markets freezing up around the world all over again.
"The European sovereign-debt problems are a potentially serious setback," Daniel Tarullo said in testimony before congressional subcommittees.
But Mr. Porter said the markets have now moved beyond that and are now focused on the possibility of "a deeper global slowdown" that would result if the European issues are not contained.
As a major global economy roughly the size of the United States, Europe is a key driver of global growth and if European demand starts to fall, as is already happening, the rest of the world will feel it.
As a major global economy roughly the size of the United States, Europe is a key driver of global growth.
If European demand starts to fall, as is already happening, the rest of the world will feel it.
That includes regions such as Canada and China that have so far avoided serious recessions.
Indeed, Canada emerged largely unscathed from both the crisis and the economic downturn that followed partially because Canadian governments did a better job of handling their finances than most other countries.
But one reason for the widening of credit spreads on Canadian government debt may be that investors are starting to take a second look at the quality of that debt.
In a report titled Is Canada Really So Pristine on the Debt Front, Mark Chandler, a fixed-income strategist with RBC Dominion Securities Inc., notes that Canada is average with other major countries in terms of the size of its debt, about 83% of gross domestic product, sandwiched between Britain (78%) and the United States (93%).
As a result of being downgraded by most of the rating agencies about 15 years ago, Canada lost its appeal to many foreign investors and little Canadian debt is now held by foreign institutions, which is a good thing when credit markets are roiled.
However, Canada still faces the worry that holders of its debt may not be willing to renew, known as "roll-over risk," and once again we are about at "the middle of the pack" internationally, Mr. Chandler says in the report released yesterday.
"We are starting to see interbank lending rates back up again and that's an unfortunate development," said Doug Porter, deputy chief economist at BMO Capital Markets. "We are starting to see investors shun any kind of risky trade again, whether corporate bonds or equities. We are seeing risk aversion right across the board."
While Canada has only modest direct exposure to troubled European countries, like other major economies it is feeling the indirect impact of turmoil in global financial markets sparked by fears of a possible sovereign default.
The early days of the crisis that climaxed early last year were characterized by a steady retreat by lenders from any kind of risk, reflected in steadily rising rates that banks charged each other for short-term loans, which eventually moved so high that interbank lending was effectively halted.
Conditions in Canadian credit markets are still nowhere near where they were in March 2009 at the height of the storm but the widening of spreads in just about every sector is a worrying "echo of what happened," Mr. Porter said.
The comments come after German Chancellor Angela Merkel slapped a ban on the short-selling of certain kinds of stocks and bonds, that sparked anger among other European leaders and sent equity markets into a tailspin as investors concluded the European bailout was unravelling.
The closely watched London Interbank Offered Rate climbed to the highest level in 10 months earlier this week as international banks hoarded money and investors grew more leery of risk.
Meanwhile, a U.S. Federal Reserve governor yesterday warned that the European troubles could spark another financial crisis, with credit markets freezing up around the world all over again.
"The European sovereign-debt problems are a potentially serious setback," Daniel Tarullo said in testimony before congressional subcommittees.
But Mr. Porter said the markets have now moved beyond that and are now focused on the possibility of "a deeper global slowdown" that would result if the European issues are not contained.
As a major global economy roughly the size of the United States, Europe is a key driver of global growth and if European demand starts to fall, as is already happening, the rest of the world will feel it.
As a major global economy roughly the size of the United States, Europe is a key driver of global growth.
If European demand starts to fall, as is already happening, the rest of the world will feel it.
That includes regions such as Canada and China that have so far avoided serious recessions.
Indeed, Canada emerged largely unscathed from both the crisis and the economic downturn that followed partially because Canadian governments did a better job of handling their finances than most other countries.
But one reason for the widening of credit spreads on Canadian government debt may be that investors are starting to take a second look at the quality of that debt.
In a report titled Is Canada Really So Pristine on the Debt Front, Mark Chandler, a fixed-income strategist with RBC Dominion Securities Inc., notes that Canada is average with other major countries in terms of the size of its debt, about 83% of gross domestic product, sandwiched between Britain (78%) and the United States (93%).
As a result of being downgraded by most of the rating agencies about 15 years ago, Canada lost its appeal to many foreign investors and little Canadian debt is now held by foreign institutions, which is a good thing when credit markets are roiled.
However, Canada still faces the worry that holders of its debt may not be willing to renew, known as "roll-over risk," and once again we are about at "the middle of the pack" internationally, Mr. Chandler says in the report released yesterday.
Thursday, May 20, 2010
JUNE 1 HIKE IN QUESTION
By Claire Sibonney Reuters The negative news has led many to question whether Bank of Canada will start raising rates from their current record lows on June 1.
Yields on overnight index swaps, which trade based on expectations for the Bank of Canada's key policy rate, have fallen in recent weeks and on Wednesday indicated just a 51 percent chance of a June 1 rate increase.
On April 20, when the bank removed its conditional pledge to keep interest rates on hold until the end of June, the market priced in more than a 90 percent likelihood.
Currencies tend to strengthen as interest rates rise as higher rates often attract capital flows.
"Even with the ongoing uncertainty, the Canadian situation warrants a small move toward more normal rates so I wouldn't unwind the forecast just yet," said Craig Wright, chief economist at Royal Bank of Canada., whose bank was the last primary dealer to join the call for a June 1 move.
"We're really just looking at a 25 basis point adjustment ... tapping of the brakes rather than slamming them on."
Yields on overnight index swaps, which trade based on expectations for the Bank of Canada's key policy rate, have fallen in recent weeks and on Wednesday indicated just a 51 percent chance of a June 1 rate increase.
On April 20, when the bank removed its conditional pledge to keep interest rates on hold until the end of June, the market priced in more than a 90 percent likelihood.
Currencies tend to strengthen as interest rates rise as higher rates often attract capital flows.
"Even with the ongoing uncertainty, the Canadian situation warrants a small move toward more normal rates so I wouldn't unwind the forecast just yet," said Craig Wright, chief economist at Royal Bank of Canada., whose bank was the last primary dealer to join the call for a June 1 move.
"We're really just looking at a 25 basis point adjustment ... tapping of the brakes rather than slamming them on."
Wednesday, May 19, 2010
Friday's inflation rate expected to open door to interest rate hikes: economists
By Julian Beltrame, The Canadian Press
OTTAWA - Canadians likely have only two weeks left to enjoy historically low interest rates.
With global markets beginning to stabilize following the recent fears over a Greek debt default, economists say the pieces are falling into place for the Bank of Canada to move off its emergency 0.25 per cent rate on June 1.
Economists — and markets — have already pencilled in a doubling of the policy rate in two weeks. But that is only a beginning say analysts who believe governor Mark Carney will keep on hiking rates through the rest of the year.
Even the TD Bank, which only a few months ago was advising Carney to wait until at least the third quarter of 2010, is now calling for an incremental hike beginning in June.
The reason, says the bank's director of forecasting Beata Caranci, is that the Canadian economic recovery is well ahead of schedule with what looks like two consecutive quarters of five per cent and beyond growth, a jobs recovery more robust than predicted with another 109,000 added in April, and inflation — the key indicator for the central bank — heading toward two per cent.
"The bank is looking a year or year-and-a-half out, and they are looking at an output gap that is not going to be there anymore, so they've got to start adjusting now to get the interest rate at what would be considered more neutral," she explained.
"And if they don't go now, it could mean we see bigger adjustments down the road," she added.
Higher rates are meant to slow down excessive borrowing and head off asset bubbles like an overheated housing market, which the central bank has already highlighted as a risk. Cheap money is also seen as destabilizing in the long term, much as happened in the United States in the early part of the decade and eventually led to the most recent crisis.
Economists caution that the anticipated hikes by the central bank should not be seen as an attempt to slow down activity, but merely as moving to a more traditional posture. With inflation at near two per cent, the current 0.25 per cent level is actually a negative interest rate, they note.
The TD Bank and many others believe Canada's policy rate will hit 1.5 per cent by year's end, more in line with inflation.
Carney gave a strong hint last month that he was preparing to move, surprising observers by dropping his year-long conditional pledge not to hike rates until at least July.
He has since added an element of doubt into expectations by noting that he considered the very act of removing the conditional commitment to have been a policy tightening measure. The rate-hiking narrative took another detour earlier this month with the recent turmoil in equity and financial markets over government debt issues in southern Europe — that added new uncertainty to the global recovery scenario.
But unless Europe again flares up in a major way, the only question remaining for Carney will likely be answered Friday with the release of April inflation data by Statistics Canada, say economists.
The consensus is that headline inflation will rise to 1.6 per cent and core underlying inflation — the index the central bank closely watches — will edge up to 1.8 per cent.
Those numbers are still below the bank's two per cent target but economists say they are worried because inflation is digging in at a time when the economy is still operating far below capacity, and at a time when the Canadian dollar is near parity.
That is not the case in the U.S., where inflation is actually heading south and could once again approach zero by year's end.
"Even with the current volatility in financial markets, the Canadian story remains intact as underlying fundamentals continue to improve alongside strong corporate and household balance sheets," write Scotiabank economists Derek Holt and Karen Cordes Woods in forecasting an interest rate hike.
Bank of Montreal economist Douglas Porter says there is still a chance Carney will wait until July 20, or even later, especially if the European crisis threatens to leak into North American credit markets, or if there's a big downward surprise in underlying inflation Friday.
Increasing rates in Canada, especially since the U.S. is likely to keep its policy rate at zero until 2011, will put added upward pressure on the Canadian dollar, which will further depress the country's manufacturing and exporting sectors.
But Caranci believes the dollar impact will be minor, because markets have already priced in several moves by Carney ahead of the U.S. And the loonie's recent dip below parity to about 96 cents US has partly removed an important impediment to act on rates for the Bank of Canada, she adds.
OTTAWA - Canadians likely have only two weeks left to enjoy historically low interest rates.
With global markets beginning to stabilize following the recent fears over a Greek debt default, economists say the pieces are falling into place for the Bank of Canada to move off its emergency 0.25 per cent rate on June 1.
Economists — and markets — have already pencilled in a doubling of the policy rate in two weeks. But that is only a beginning say analysts who believe governor Mark Carney will keep on hiking rates through the rest of the year.
Even the TD Bank, which only a few months ago was advising Carney to wait until at least the third quarter of 2010, is now calling for an incremental hike beginning in June.
The reason, says the bank's director of forecasting Beata Caranci, is that the Canadian economic recovery is well ahead of schedule with what looks like two consecutive quarters of five per cent and beyond growth, a jobs recovery more robust than predicted with another 109,000 added in April, and inflation — the key indicator for the central bank — heading toward two per cent.
"The bank is looking a year or year-and-a-half out, and they are looking at an output gap that is not going to be there anymore, so they've got to start adjusting now to get the interest rate at what would be considered more neutral," she explained.
"And if they don't go now, it could mean we see bigger adjustments down the road," she added.
Higher rates are meant to slow down excessive borrowing and head off asset bubbles like an overheated housing market, which the central bank has already highlighted as a risk. Cheap money is also seen as destabilizing in the long term, much as happened in the United States in the early part of the decade and eventually led to the most recent crisis.
Economists caution that the anticipated hikes by the central bank should not be seen as an attempt to slow down activity, but merely as moving to a more traditional posture. With inflation at near two per cent, the current 0.25 per cent level is actually a negative interest rate, they note.
The TD Bank and many others believe Canada's policy rate will hit 1.5 per cent by year's end, more in line with inflation.
Carney gave a strong hint last month that he was preparing to move, surprising observers by dropping his year-long conditional pledge not to hike rates until at least July.
He has since added an element of doubt into expectations by noting that he considered the very act of removing the conditional commitment to have been a policy tightening measure. The rate-hiking narrative took another detour earlier this month with the recent turmoil in equity and financial markets over government debt issues in southern Europe — that added new uncertainty to the global recovery scenario.
But unless Europe again flares up in a major way, the only question remaining for Carney will likely be answered Friday with the release of April inflation data by Statistics Canada, say economists.
The consensus is that headline inflation will rise to 1.6 per cent and core underlying inflation — the index the central bank closely watches — will edge up to 1.8 per cent.
Those numbers are still below the bank's two per cent target but economists say they are worried because inflation is digging in at a time when the economy is still operating far below capacity, and at a time when the Canadian dollar is near parity.
That is not the case in the U.S., where inflation is actually heading south and could once again approach zero by year's end.
"Even with the current volatility in financial markets, the Canadian story remains intact as underlying fundamentals continue to improve alongside strong corporate and household balance sheets," write Scotiabank economists Derek Holt and Karen Cordes Woods in forecasting an interest rate hike.
Bank of Montreal economist Douglas Porter says there is still a chance Carney will wait until July 20, or even later, especially if the European crisis threatens to leak into North American credit markets, or if there's a big downward surprise in underlying inflation Friday.
Increasing rates in Canada, especially since the U.S. is likely to keep its policy rate at zero until 2011, will put added upward pressure on the Canadian dollar, which will further depress the country's manufacturing and exporting sectors.
But Caranci believes the dollar impact will be minor, because markets have already priced in several moves by Carney ahead of the U.S. And the loonie's recent dip below parity to about 96 cents US has partly removed an important impediment to act on rates for the Bank of Canada, she adds.
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