Le point sur le marché de la dette en capital - été 2022
juillet 22, 2022
From pandemic to interest rate panic
Over two years ago, an unprecedented COVID-19 pandemic had significantly impacted the global economy, with mandatory lockdown and work-from home arrangements sending the Bank of Canada overnight rate plummeting from 1.75% on March 1st, 2020, to 0.25% by March 29th. Today, with the economy rebounding, a war ongoing in Ukraine, lockdowns continuing in China and ever-rising prices in food and energy due to rising labor costs and supply chain issues, the world could not look more different than in 2020, causing major inflation issues in an economy rebounding from the pandemic.
On June 1st, 2022, the Bank of Canada hiked its overnight rate by 50 basis points. They are taking an aggressive approach to curbing soaring inflation, which hit 6.8% in April 2022 - the highest since January of 1991. In addition, the United States Federal Reserve announced a rate hike of their own, raising by 75 basis points to a benchmark funds range of 1.5-1.75%. After the previous American Federal funds rate increase on March 16, we saw a 60bps increase after three weeks for the 5-year Canada bond yield and a 35bps increase for 10-year bonds. It is likely the Government of Canada will hike the overnight rate on both July 13th and in September to further combat rampant inflation.
Since January 2021, the 5-Year Government of Canada Bond Yield has been steadily increasing, where on June 8, 2022, the yield surged past 3% and hit the 3.60% threshold on June 13, a level that had not been seen since 2008. The rise is over 100 basis points in less than two weeks, a stark contrast to the 0.3% yield we saw back in mid-2020. Back in January, the 5-year GOC was trading at approximately 125bps and the 10-year was trading at approximately 145bps. Since the high point on June 13, the bond yields for both 5 and 10-year have been stabilizing, being at 3.106 for 5-year bonds and 3.211 for 10-year bonds as of June 29. Spreads have remained tight, being between 10 bps.
Pre-COVID 5-year mortgages could be obtained within the 3’s and spreads were not that different compared to today. Presently, pricing remains in the high 4’s to low 5’s for all but AAA-grade properties. The result is that based on required Debt Coverage Ratios, less debt capital is available, or acquisition prices may have to be renegotiated to allow purchasers to meet their investment criteria. This has yet to be firmly recognized by the transactions that are closing. To mitigate the impact of inflationary pressures on interest rates, we have been working with lenders to fix favorable rates for our clients to ensure they are not overly impacted by the recent federal rate increases. With the costs of lending becoming increasingly more expensive, we can see a negative impact on the value of real estate in the future due to buyers holding off from completing transactions until interest rates stabilize, adjusting a real estate market rebounding from a long pandemic. Thus, many are rushing to complete deals now while locking in rates to mitigate any impacts.
The debt renewal market will represent the largest risk to borrowers over the next year. Anticipating an uncertain market well ahead of time by engaging a debt professional to analyze the asset and prepare a submission can result in executing a debt opportunity at the low point in the trend.
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