Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.
Canada's finance department was cautioned before a government proposal to eliminate a mortgage-backed bond program that such a move could threaten financial stability and raise costs across the nation's CAD4 trillion debt market, according to a document obtained by MNI.
The memo from Canada Mortgage and Housing Corp. vice presidents Nadine Leblanc and Michel Tremblay was sent Nov. 1 to finance department assistant deputy minister Isabelle Jacques. MNI obtained the four-page document via a freedom of information request and a few parts were redacted.
Canada Mortgage Bonds “support CMHC’s financial stability mandate” that “ensures continuity of mortgage funding for Canadians in all business cycles,” the letter said. The program turning pools of approved mortgages into government-backed bonds was created in 2001 and this year's annual report showed CAD255 billion of guarantees.
“It would be difficult to find an example of a sovereign directly funding its banking system” as the proposal entails according to the letter from officials at CMHC, the federal housing agency overseeing the program. The move could also blur the line between government financing and “crisis intervention,” officials wrote.
Finance Minister Chrystia Freeland's March 28 budget said the government would consult with investors about folding the Canada Mortgage Bonds program into regular federal borrowing. That move could lower financing costs since CMBs carry a yield premium despite sharing a triple-A credit rating with federal government debt, according to the budget, which said the review will be finished for the fall fiscal update.
"The Government is working closely with CMHC on the development of this proposal in order to ensure all possible risks and benefits are considered before moving forward," Finance Department spokeswoman Maude Duguay said via email in response to questions about the memo.
The CMHC letter cited estimates from a private bank suggesting extra federal borrowing required to take over the mortgage bond program would lift federal yields 10bps, increasing borrowing costs not just for the government but across the wider CAD4 trillion fixed income market. (See: MNI INTERVIEW:Busted Canada Debt Goal Means Pain Later-Ex Aide)
The 30% share of CMBs sold to global investors would fall after the program is eliminated, narrowing the sources of public debt funding, the letter suggested. The Investment Industry Association of Canada also expressed a number of concerns about the proposal in an open letter earlier this month.
"We are committed to supporting both the review and consultations on the Canada Mortgage Bonds program announced by the Government of Canada," CMHC spokesman Leonard Catling said in response to a request for comment. "Once a final decision is made by Department of Finance, CMHC will work to successfully implement it."
Excerpt of document: 
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.