TAX NEWS - JUNE 2010

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CMHC Forecasts 15% Drop in Mortgage Debt Sales: Canada Credit

Canada Housing Trust, the financing arm of the nation's housing agency, may sell about 15 percent less debt this year as higher interest rates and sales taxes slow the rate of mortgage purchases.

The Housing Trust has issued C$13.9 billion ($13.1 billion) so far this year in 5-year, 10-year and floating-rate notes, according to estimates by Canada Mortgage and Housing Corp. Based on those figures over the full year, the trust should sell "slightly less" than C$40 billion, CMHC said in an e-mail. That compares with the record C$46.9 billion last year.

Interest-rate increases by the Bank of Canada and higher sales taxes with the harmonized sales tax in Ontario and British Columbia, two of Canada's three biggest provinces, may damp home buying, according to Carlos Leitao, chief economist at Laurentian Bank Securities Inc.

"It reflects the expectation that the Canadian housing market is going to ease from where it is now," Leitao said by phone from Montreal. "As interest rates come up a bit and the HST becomes a reality in Ontario and British Columbia, that alone would put the housing market on a slower track."

Canada Housing Trust issues debt on behalf of CMHC, which uses the proceeds to purchase packages of mortgage-backed securities from lenders. The trust has about C$180 billion of debt outstanding, including C$162 billion in fixed-rate bonds and C$18 billion of floating-rate notes.

The yield on Canada Housing Trust's 3.75 percent bonds maturing in March 2020 fell from a high this year of 4.111 percent on April 22 to 3.773 percent yesterday, according to Bloomberg data. The bonds are rated AAA by Standard & Poor's.


Alberta Capital

Issuance was C$4.7 billion in 2001, the year Canada Housing Trust began selling bonds.

Elsewhere in credit markets, Alberta Capital Finance, the financing arm of the province's municipalities, sold C$600 million of debt maturing in June 2015. The bonds priced to yield 51 basis points over government benchmarks.

The extra yield investors demanded to own the debt of Canadian corporations instead of the federal government ended yesterday at 151 basis points, from 150 basis points last week. One basis point is 0.01 percentage point.

Canada will auction C$3.5 billion of 5-year bonds on June 9, according to a statement on the Bank of Canada's website last week. The 3 percent securities mature in December 2015.

Housing starts rose to 202,000 in May, from a revised 200,700 in April, according to the median of 20 estimates in a Bloomberg survey of economists. Canada Mortgage and Housing is scheduled to release the data at 8:15 a.m. today.
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