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Amortization times for variable rate mortgages are increasing:

The growing proportion of mortgages with long amortizations gives an indication of the number of borrowers who could face significant hikes to monthly payments when they renew their loans. Currently, the bulk of variable-rate borrowers have fixed monthly payments and are not seeing their payment immediately spike with every Bank of Canada interest rate hike. But when they renew their mortgage, they will face a much higher monthly payment.

At Royal Bank of Canada, Bank of Montreal and Canadian Imperial Bank of Commerce, the percentage of mortgages with an amortization of more than 30 years has grown to around 30 per cent as of the end of October, according to their quarterly results released this week. (RBC hit 27 per cent, BMO reached 31.3 per cent and CIBC was at 30 per cent.)

That is a huge jump compared to October of last year, when the three banks had no mortgages with an amortization above 30 years, according to their financial disclosures.

At the end of July, mortgages with terms of over 30 years accounted for one quarter of the three banks’ residential mortgage portfolios. At the end of April, those loans made up 10.6 per cent of BMO’s portfolio, and 12 per cent of mortgages at RBC and CIBC.

Toronto-Dominion Bank’s financial report disclosed that 28.9 per cent of its mortgages had terms over 30 years as of the end of October. Previously, TD has not disclosed amortization periods that have stretched beyond the mortgage’s original contract. Its second and third quarter results showed the share of mortgages with their original amortizations, and only 1 per cent of its loans had terms greater than 30 years.

TXPR closed at 557.30, up 0.72% on the day. Volume today was 2.01-million, third-highest of the past 21 trading days.

CPD closed at 11.15, up 1.09% on the day. Volume was 194,590, second-highest of the past 21 trading days.

ZPR closed at 9.30, up 1.31% on the day. Volume was 244,270, a little above the median of the past 21 trading days.

Five-year Canada yields were down to 3.18% today.

A “risk-on” day was attributed to remarks by Powell:

Jerome H. Powell, the Federal Reserve chair, signaled on Wednesday that the central bank could slow its rapid pace of interest rate increases at its December meeting while making clear that borrowing costs have farther to climb as policymakers remain concerned about a sustained bout of inflation.

Investors cheered his comments, with stocks surging at the mere hint that the Fed’s supersize rate increases could soon taper off even as Mr. Powell underlined that he and his colleagues were focused on raising rates high enough to tame inflation, rather than on how fast they got there.

The S&P 500 climbed more than 3 percent, the index’s best day in over two weeks. The Nasdaq composite index, which is particularly sensitive to changing views on interest rates, rose 4.4 percent.
…
“My colleagues and I do not want to over-tighten,” Mr. Powell said, referring to rate increases that tighten the flow of money too much. “Cutting rates is not something we want to do soon. So that’s why we’re slowing down, and going to try to find our way to what that right level is.”

Still, Mr. Powell and his colleagues are trying to strike a balance. Even as they lay the groundwork to imminently slow down, they want to make it clear that they are not giving up on their campaign against rapid price increases.
…
“Consumer spending has remained resilient” and is “supported by labor income growth and still elevated savings,” Lisa D. Cook, a Fed governor, said during a speech in Michigan on Wednesday. “How far we go, and how long we keep rates restrictive, will depend on observed progress in bringing down inflation.”

The road to slower inflation could be a long one. Mr. Powell pushed back on any notion that a recent moderation in price increases is a sure sign that price jumps will return to more acceptable levels soon.

“Down months in the data have often been followed by renewed increases,” he said. And while many economists expect inflation to moderate next year, “forecasts have been predicting just such a decline for more than a year, while inflation has moved stubbornly sideways.”

I was all set to report stunning success in my campaign for more precise yield-to-maturity reporting for ZLC, given a recent eMail received from BMO:

Further to your inquiry. I have been informed we are working on a fix for our site to have an as of date for Weighted average yield to maturity, added. Each ETF may differ, however I believe ZLC is weekly.

… but BMO has taken the wind out of my sails by implementing this within a few days of letting me know; readers can now expect weekly amusement from my adjustment of the reported yields. I will be continuing the use of ZLC as my benchmark for long corporate yields as:

• It has been hallowed by years of use
• It’s investible by retail
• It’s a good fund

PerpetualDiscounts now yield 6.52%, equivalent to 8.48% interest at the standard equivalency factor of 1.3x. Long corporates yielded 4.97% on 2022-11-25 and since then the closing price has changed from 15.24 to 15.12, a decline of 79bp in price, with a Duration of 12.31 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies an increase in yield of about 6bp since 11/25 to 5.03%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened slightly to 345bp from the 340bp reported November 23.

TXPR closed at 553.30, up 0.68% on the day. Volume today was 2.48-million, highest of the past 21 trading days.

CPD closed at 11.03, up 1.01% on the day. Volume was 122,060, near the median of the past 21 trading days.

ZPR closed at 9.18, up 0.88% on the day. Volume was 300,490, fourth-highest of the past 21 trading days.

Five-year Canada yields were up a bit to 3.26% today.

Tax-loss selling season is gearing up; there are some interesting changes occuring in relative valuation at the moment. Nothing huge, nothing widespread – but enough to be noticable and, I hope, profitable!

There’s trouble with variable rate mortgages:

The most common variable-rate product has fixed monthly payments. With every interest rate hike, more of the borrower’s monthly payment goes toward interest. However, when the monthly payment no longer covers any principal, the borrower hits what is known as a trigger rate, and their monthly payment rises. In some cases, the lender allows the borrower to shift the interest onto the principal, which increases the size of the mortgage.

Fifty per cent of these variable-rate mortgage holders have already reached their trigger rate, according to estimates from a new Bank of Canada research paper published Tuesday. That share will rise to 65 per cent by the middle of next year as the central bank continues to hike interest rates to rein in inflation.

“The bottom line is that mortgage costs for some Canadians have already increased, and they will likely increase for others in time, making home ownership more expensive.” [Bank of Canada senior deputy governor] Ms. [Carolyn] Rogers said.

About 670,000 variable-rate mortgages have been issued since the start of the pandemic, according to the Bank of Canada. Variable-rate mortgages accounted for around 50 per cent of all mortgages issued since mid-2021, compared to an average of 20 per cent in the years before the pandemic.

“This is not a large share of households, but it is larger than it would have been based on historical trends,” Ms. Rogers said.

Borrowers have sought the variable-rate products because borrowing costs have typically been cheaper than fixed-rate mortgages. Part of the motivation was that federal banking rules require borrowers to prove they can make their monthly mortgage payments at an interest rate at least two percentage points higher than their actual mortgage contract

Less formally, my brother tells me that the forums on Reddit are filled with plaintive wails that the poster has a variable rate mortgage and doesn’t know what to do. The thing about our collective huge debt to income ratio is that it won’t take a lot of pressure to cause a lot of pain.

However, the Junior Republicans are eagerly seeking to cement themselves in as the Party of Stupid:

The Conservatives, led by Mr. Scheer, dialled in on the Bank of Canada losing money for the first time in its 87-year history. The central bank’s balance sheet expanded massively during the pandemic, as a result of its government bond-buying program, also known as quantitative easing, or QE. Now the rapid rise in interest rates has created a mismatch on its balance sheet.

The bank is paying a higher rate of interest on some $200-billion worth of commercial bank deposits held at the central bank than it is earning on the government bonds it bought during the pandemic, resulting in net interest losses. It estimates it will lose between $5-billion and $6-billion in the next year or two, before returning to profitability in 2024 or 2025.

Because the bank is not allowed to retain its earnings and it does not have a reserve fund, the Department of Finance needs to decide whether to cover the bank’s losses directly or come up with some other method that would allow it to make up for the losses once it returns to profitability.

The Conservatives have long criticized the bank’s QE program, and Mr. Scheer said the central bank appears to need a “bailout.” Mr. Macklem said that it was largely an “accounting issue,” and pointed to several solutions that are being developed by other central banks.

“Whatever solution is chosen, it’s not going to affect how we run monetary policy,” he said.

So … um … why don’t we run monetary policy by determining what policy will cause the BoC to make massive profits and then following that? Then we’ll all be rich! This would, quite possibly, be a good way to opt out of inflation. For real, this time.

PerpetualDiscounts now yield 6.70%, equivalent to 8.71% interest at the standard equivalency factor of 1.3x. Long corporates now yield 5.32%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened to 340bp from the 310bp reported November 16. However, I suspect that the “Weighted Average Yield to Maturity” reported by BMO on their ZLC page is not kept current; anything to withhold information from the masses is good business for the banks! I’ve sent an inquiry; we’ll just see what kind of answer I get! So far, I’ve simply gotten the run-around, since BMO is of course a bank, which means their staff is not only completely untrained, but is left hanging out to dry when they yell for help. My guy’s trying hard, but I may have to write a letter for them to file after sending me a soothing response.

Assiduous Reader KC has, however eMailed me to suggest an alternative: the ICE BofA 10+ Year Canada Corporate Index (F9C0). This is under serious consideration.