Canada Lifts Mortgage Bond Plan by 50% to Boost Construction

Prime Minister Justin Trudeau’s government is increasing the size of a mortgage-bond program by 50% to try to boost apartment construction and bring down surging housing costs.

(Bloomberg) — Prime Minister Justin Trudeau’s government is increasing the size of a mortgage-bond program by 50% to try to boost apartment construction and bring down surging housing costs. 

The annual limit for Canada Mortgage Bonds will rise to C$60 billion ($44 billion), Finance Minister Chrystia Freeland said Tuesday, with the additional C$20 billion going toward financing rental housing projects. 

The announcement appears to mark a reversal — at least temporarily — of the government’s proposal to phase out the mortgage-bond program. Freeland, who floated the idea of getting rid of CMBs in March as a cost-saving measure, said the government is still considering such a move, she said. 

Spreads widened on an issue of mortgage bonds due 2033. The 3.65% notes were quoted at nearly 48 basis points over the Canadian government yield curve, compared with 46 basis points on Monday, according to Bloomberg indicative bid prices.

Canada Mortgage Bonds are always priced with extra yield over Canadian government debt, even though they are guaranteed by Ottawa and rated AAA. Trudeau’s government is deciding whether to wind down the operation by merging it into its main borrowing program. 

But the proposal has come under fire from market participants, who have argued that it may have unintended consequences. They’ve warned that money that would otherwise flow into CMBs may end up going elsewhere rather than into Canadian government bonds, driving up yields for government and corporate borrowers. The country’s finance department finished a consultation on the plan in July.

Read More: Mortgage-Bond Shakeup Risks Backfiring on Trudeau, Investors Say

Around 40% of the CMB program is placed with international investors, according to a letter sent to the government by the Investment Industry Association of Canada.

“I do want to assure all Canadians, and maybe more specifically market participants, that this is something that we are doing very deliberately, very thoughtfully, very carefully, very intentionally — quite separate from our ongoing consideration of how the Canada Mortgage Bond program itself will work,” Freeland said.

But one bond investor said Freeland’s words are only adding to confusion about the program’s future. 

“For one of the largest public borrowing programs on the planet, the government’s inconsistent signaling around the continuation and size of the program is making CMB bonds less appealing,” said Ryan Goulding, a fixed-income manager at Vancouver-based Leith Wheeler Investment Counsel. The firm is reducing its exposure to the “due to this uncertainty.”

The Trudeau government has been under intense pressure to improve affordability in the country, especially for housing, as rents and mortgage costs jump. 

Freeland said the move would help stimulate the construction of as many as 30,000 more rental apartments per year. The government recently waived federal sales tax on new rental-housing construction.

Highly rated securities in Canadian dollars benefit from international demand from reserve managers such as central banks, which at the end of first quarter had $270.8 billion of assets denominated in loonies, according to International Monetary Fund data.

(Updates with market reaction and details throughout)

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