If you’ve ever thought that using a payday loan to pay off a credit card was a good idea, you’re about to be all kinds of impressed. The Government of Canada (GoC) has begun buying billions in Canada Mortgage Bonds (CMBs), in a last ditch effort to stimulate more borrowing. The planned purchases are equivalent to three-quarters of the cash the Federal government is forecast to borrow this year. In addition to recklessly stimulating the market, it serves as a huge warning sign that Canada is unable to find global investment to support its credit markets. Yikes.
Canada Plans To Simulate Housing Demand With $30B In Canada Mortgage Bonds Per Year
Just so we’re all on the same page, let’s quickly discuss Canada Mortgage Bonds (CMBs). Lenders originate mortgages, pool them, then sell the pools as mortgage backed securities (MBS) to the government. To fund the purchase, the government sells CMBs to investors to acquire funds. The cash flow from the MBS is then used to pay investors that bought the CMBs. In short, CMBs are state-backed securities to fund mortgage financing in Canada.
Starting this year, Canada doesn’t want to just sell and guarantee CMBs. In the 2023 Fall Economic Statement, they announced they’ll also become the buyer. They’ll purchase half of the 5- and 10-year CMBs, up to $30 billion. The government is essentially borrowing money to buy the investments they guarantee, with bonds they also guarantee. It’s even dumber than it sounds.
Canada Is Spending 75% of Its Planned Budget Deficit To Buy Mortgage Bonds
The move will inject additional liquidity into the mortgage market, similar to the way quantitative ease (QE) did. While the Bank of Canada (BoC) will be in charge of executing this policy, they want it to be crystal clear—this isn’t QE, it’s fiscal spending. QE involves balance sheet expansion and is designed to stimulate demand, and raise inflation. The GoC policy will only stimulate mortgage demand and therefore apply positive pressure to inflate home prices.
If Canada had money, it would be arguably good news—cheaper mortgages, at the expense of stimulating even more housing demand. Unfortunately, the country’s budget deficit is forecasted at $40 billion this year. That means 75% of the cash they’re borrowing will be used to provide cheaper mortgages. In short, they’ll borrow money to stimulate demand to borrow money. Or as Ludicrous would say, “yo dawg! We heard you like debt, so we put debt in your debt!”
Canada Blew Through 25% of Its Mortgage Bond Budget In 2 Months
To date, the BoC has participated in two auctions to administer the program. There was a $3.5 billion purchase of 10-year CMBs in February, and a $4 billion purchase of 5-year bonds that will settle on Wednesday. A quarter of the budgeted spend has already been deployed in just the first two months of the program.
The program isn’t just a silly plan where the government is guaranteeing its own liabilities. It’s also one where the government is attempting to hide the true cost of borrowing by distributing interest across taxpayers. Since credit markets aren’t as easily tracked (or understood) by the average person, it appears this is just window dressing so people don’t have to face the true cost of borrowing.
However, there’s a much bigger takeaway regarding Canada’s relationship with capital markets. If there was sufficient demand for loonie-based instruments, there would be no need for state-backed liquidity injections. This serves as yet another reminder that global investment in Canada is drying up—just a few weeks ago the country saw a record outflow of investment capital. Ironically, it’s been drying up due to the lack of growth due to the economic stagnation resulting from an economy based largely on real estate.
