Bond Yields Drop 80 Bps in 90 Days

Today we'll take stock of the current lending environment and how it will impact the multifamily market.

August 30th, 2024

Read Time: 3 minutes

Bonds yields are down 80 bps since June 1st.

And although this technically means our economy is on it's knees - we're multifamily folks who live and die by the sword - so hallelujah!

But it's not quite as simple as "bond yield down, value up" Caveman voice.

There's more than just one factor at play. We'll unpack this.

Today we'll dive into the current state of multifamily financing, and the impact it will have on values and activity as we set sail for December.

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I'll be on stage at the Canadian Apartment Investment Conference again this year. Reach out and we can find a time to get together. Click [here](https://informaconnect.com/canadian-apartment-investment-conference/) to see the event details.

Note the photo above is from a different multifamily panel from 2 months ago, but you get the idea.

Bond Yields: Unpacked

First - a distinction.

I hear a lot of conflation between the BoC Policy Rate and the 5-Yr bond yield from multifamily owners.

But they're different.

The Policy Rate (or overnight rate) is the interest rate at which major financial institutions borrow and lend one-day (overnight) funds among themselves. Tiff Macklem sets this in his announcements.

The 5 Yr Bond Yield - which forms the basis of multifamily financing - is the market-driven return on a Canadian government bond over 5-years. This is the one you care about.

One is based on reality. The other is based on expectation.

And today - the policy rate is moving in one direction - down. But the bond yield moves up and down based on if we beat or miss on inflation forecasts, unemployment expectations and so on.

So for instance, the policy rate is at 4.5% today, and economists anticipate fast and deep cuts to 3.0% by next July.

But that expectation is baked in to your financing rate already. If rates come down slower, yields go up!

Where am I going with this?

Well unless you have better access to information than the big 5 bank economists, don't waste energy predicting where yields are going. Play with the cards in your hand.

Costs of Funds Today

With all that said - the cards in your hand today are pretty great.

As a result of a weaker than anticipated economy (on both sides of the border) - yields have dropped materially in the last 90 days.

The Canada Mortgage Bond (CMB) 5-yr is currently sitting at 3.21%, implying your CMHC loan will be just under 4% today. This is the first we've seen of this since last December, and it's welcome news.

It's important to note that cap rates don't move with bond yields in a 1:1 ratio (although obviously there's a correlation over time).

This is because A) Deals typically take 3 - 6 months, and B) cap rates did not rise nearly as fast as bond yields in the preceding 2 years, and some surmise there's still ground to cover.

What this does do, however, is spur optimism and activity.

One of the great challenges for purchasers since 2022 has been solving the loan-to-value (LTV) problem. When you're used to 75%+ LTVs and your lender offers you 40% - deals are tough to buy.

With these recent yield drop in yields, we're coming back the the LTVs we've come to know and love. Hence, buyer's have more fuel in the tank.

Further - dormant investors are starting to wake up. We've structured several great deals for our vendors recently, and have more coming. September is looking very, very exciting for our market.

In conclusion - hold onto your hats - the "new normal" will be a breath of fresh air. Expect to feel more energy in the market and deals actually getting done.

Buyer and seller alignment is truly a thing of beauty.

Have an amazing long weekend!

👋 P.S. I helped my clients sell $263M in 2023 ([see recent deals](https://www.collierscanada.com/en-ca/experts/dayma-itamunoala)).

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