Some insightful remarks about the state of Canadian financial markets, and the impacts of the sub prime mortgage effects on world. My take on the three points:

• some FI’s are having trouble with market funding
• some banks are raising significantly higher liquidity, through debt at historically higher rates differentials above government bonds
• and the kicker … banks are reputedly going to repatriate mortgages back into their balance sheets.

This is a strange grouping of facts. This suggests to me that the mortgage securitisation market is drying up, and that banks will have to self fund their mortgage growth, and at higher rates. Expect lending rates to increase, and discounts to evaporate.

Canadian Banks & Insurance

“We’ve seen the rollovers haven’t been 100 percent, so there has been some support provided to those,” said Maidment, speaking at an investor conference today. “That was particularly a problem in August, and it’s much improved into September.”

Canadian Banks & Insurance

Faced with dwindling demand for their short-term debt offerings, Canadian
banks have lured investors in the past month by selling massive amounts
of medium-term debt securities at bargain prices.  The biggest issuer so far has been Royal Bank of Canada, which has sold $4.4-billion worth of three-to-five-year senior deposit notes in five separate offerings since mid-August, an amount and volume of deals market observers characterized as unusually high.

Canadian Banks & Insurance

Some seasoned bond investors speculate the large debt offerings are part of an effort by the banks to free up their balance sheets so they can “repatriate” assets such as car and mortgage payments that were previously rolled into short-term securities called “asset backed commercial paper. ” The ABCP was typically rolled from one 30-to 90-day issue into the next. But because of a meltdown in one part of the ABCP market in August, investor appetite for all such securities has dropped in Canada — even the offerings sponsored by the banks. “It’s part of a flight to quality,” said Mr. Lamont. “A lot of people will go to the most risk-averse alternatives,” such as government bonds.

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