Canada Mortgage and Housing Corp.'s (CMHC) plan to introduce Canada Mortgage Bonds (CMBs) - bonds that feature semi-annual interest payments, a repayment of principal at maturity and payment guarantee by CMHC - will have both a good and bad effect on the Canadian securitization market, sources say.
These bonds will be issued through a special purpose trust called Canada Housing Trust. Proceeds from the sale of these bonds will be used to buy mortgage-backed securities. Bondholders will be paid with the interest and principal from the funds derived from the underlying mortgages.
These semi-annual bullet bonds, although backed by residential mortgages, (because they carry a government guarantee on them), will be trading like a structured government product rather than a triple-A spread product the way asset-backed securities do.
The CMHC currently issues unsecured debt somewhere between15 basis points or so above equivalent government of Canada (GOC) bonds. Market sources say that CMBs would likely trade inside of 15 basis points because of the volume of issuance that they could create. The significant volume will make them almost as liquid as government bonds.
"For people that were traditionally buyers of government securities that have not made the transition to buying triple-A asset-backeds, it would probably be a welcome halfway house," said David Allan, head of securitization at CIBC World Markets. "They won't have to get themselves over the complexity hurdle of buying triple-A structured spread product; instead, they can migrate just to this structured government debt."
Although the program would be a big source of product for the Canadian securitization market, experts say that the program may crowd out opportunities for asset-backed product and other triple-A products that trade at a higher spread because such securities do not carry any government guarantee.
The program, CMHC said, would likely begin in the spring.