The federal government has backed away from plans to scrap the $250-billion Canada Mortgage Bond program, in response to pushback from investors.
Instead, it will become a major buyer of the assets, purchasing up to $30-billion worth of Canada Mortgage Bonds annually, the government said on Tuesday in its fall economic update. It will begin buying the bonds starting in February.
Canada Mortgage Bonds, also known as CMBs, are issued by the Canada Mortgage and Housing Corp. (CMHC). The Crown corporation uses the proceeds from the bond sales to purchase pools of mortgages, known as mortgage-backed securities, from private lenders. The goal of the CMB program is to help funnel capital toward smaller lenders and ultimately lower interest rates on mortgages.
In its spring budget, Ottawa said it was considering ending the CMB program and rolling it into the government’s general borrowing program. CMBs have a slightly higher yield than normal government bonds, and the government said it was looking to find a way to capture that spread for itself, and use the proceeds to fund affordable housing initiatives.
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The proposal was heavily criticized on Bay Street. CMBs are popular among investors because they’re guaranteed by the government but offer a higher return. Some analysts also said that doing away with CMBs and replacing them with additional government bond issuance could push up yields on government bonds and impact other assets.
The government said in its economic update that it met with more than 30 market participants, and heard that mortgage lenders needed “a market-based instrument to hedge risks.”
Ottawa will now issue more of its own debt and use that money to buy up to $30-billion of CMBs. The government estimates that it will earn around $1.7-billion on the spread over the next five years.
Despite the uncertainty surrounding the CMB program since the spring, last month the government tasked CMHC with issuing more CMBs and using the proceeds to buy pools of mortgages tied to rental home construction. That expanded the total size of annual issuance from $40-billion to $60-billion. Under the plan announced Tuesday, the annual CMB issuance the government doesn’t buy for itself will be available for private investors.
Ian Pollick, head of fixed income, currency and commodity strategy at Canadian Imperial Bank of Commerce, wrote in a note to clients that the operational details of the government’s purchases are not yet known. “It is likely they will largely be facilitated in the primary market,” he wrote.
“In essence then, despite the growth of the program’s sizing, from $40-billion to $60-billion, net-supply will actually fall by $10-billion if the entire sleeve is purchased per year.”