Monday, March 30, 2009


Here are some thoughts courtesy of the Senior Economist at CIBC, Benjamin Tal. Highlighted at the end of the posting are uplifting comments for Canadians ... as always we recommend that when you want information regarding the current low rate environment and whether its in your best interest to refinance, contact a licensed mortgage broker.

The main focus in the market is currently on the Geithner Plan. To summarize it in very simple terms the plan is
a trillion-dollar operation by which the US acts as the world's largest hedge fund investor. The money will be committed to funds to buy up risky and distressed assets. However, it is possible that at the moment those
assets are fundamentally undervalued. So it is probable that if the funds hold the assets to maturity or until markets recover so that risk premiums are back to normal, they can sell them off at a profit.

It is a good move—not a sufficient condition for a recovery but clearly, a necessary one. Without some stability in the US financial system, we will not be able to see a sustainable recovery. And this move is undoubtedly an important one towards achieving this goal.

Another important development is that the Fed is now using quantitative easing to buy long term government bonds. And it is working. Long-term yield fell to around 2.7%—generating another wave of refinancing in the US mortgage market.

There are a few more signs of stabilization in selected pockets of the US economy. One that we follow very closely is US-based cargo volumes, which had been falling steeply for several months, are beginning to show signs of stabilizing. While too early to call this a recovery, measures of seaport, rail, trucking and airport activity
are encouraging given the recent run of gloomy economic news.

As well, credit spreads for emerging market issuers have narrowed following the US government's latest plan to purchase toxic assets from banks. Since last week, the global dollar-denominated emerging market spread — the difference between rates offered by emerging market corporate and sovereign bonds and US Treasuries,
narrowed by almost 30 basis points. And at close to 940 basis points, they are now well below the 1,300 basis points we have seen in late 2008, but are still significantly above the pre-crisis level of 400 basis points.

In Canada, despite recessionary conditions, household credit growth is still relatively healthy. Overall mortgage outstanding are rising by close to 10% on a year-over-year basis, but on a month over month basis things are clearly slowing. The extremely low mortgage rate is now generating a refinancing wave we have not seen in many years and, in fact, activity in the resale market is showing some signs of life.

We are also seeing a relatively healthy growth in lines of credit—currently rising by 15% on a year-over-year basis. This increase reflects a notable increase in credit limits in the past few years, and with borrowers not reducing their utilization rate, overall credit outstanding is rising.

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