What Moved
The Bank of Canada had no scheduled decision in February, holding at 4.50% under its conditional pause. The focus shifted to economic data: Canadian employment remained surprisingly strong, adding complexity to the inflation picture.
Housing prices in southwestern Ontario were now down 20-26% from their March 2022 peaks. But February data showed the first tentative signs of a housing market bottom forming — sales volumes ticked up modestly, and new listings remained constrained. The supply-demand imbalance that characterized Canadian housing had not disappeared; it had merely been obscured by rate shock (CREA, Feb 2023).
Canadian CPI for January came in at 5.9%, continuing the gradual decline but remaining well above the 2% target. The slow pace of disinflation reinforced expectations that rates would stay elevated for an extended period (StatsCan, Feb 2023).
Private credit markets were adjusting to the new rate reality. MIC managers reported that borrower behaviour was stabilizing — those who needed to refinance were finding solutions, and those who couldn't were negotiating extensions or orderly exits. The acute stress of mid-2022 was transitioning to a more manageable chronic adjustment.
What It Means
The signs of a housing bottom, however tentative, were the most important signal for Canadian private credit investors since the tightening cycle began. If prices stabilized, the collateral underpinning MIC loan portfolios would stop deteriorating. LTV ratios would stop rising. And the path to loan resolution — whether through borrower refinancing, property sale, or extension — would become clearer.
For investors considering new private credit allocations, the February environment was arguably more attractive than any point in the previous three years. Yields were at cyclical highs (reflecting the elevated rate environment), property valuations were down significantly from peaks (providing better collateral coverage on new loans), and the competitive landscape had thinned (fewer lenders competing for deals meant better terms).
The employment strength was a double-edged sword. Strong employment supported borrower capacity to service debt — positive for private credit and other alternative investments in Canada with exposure to borrower income. But it also complicated the BoC's inflation fight, potentially extending the period of elevated rates.
What We're Watching
The March BoC decision — the first under the conditional pause — would be closely watched for any change in tone. A hold was expected, but the statement would be parsed for clues about the duration of the pause.
Spring housing data would be definitive. If the floor held through the traditional spring surge, it would confirm that the correction had run its course.
US banking sector developments were drawing attention — several regional banks were showing signs of stress, which could have implications for the global rate environment. The vulnerability of US institutions with concentrated bond portfolios and unhedged duration risk was a growing concern that Canadian observers were monitoring carefully.
For investors evaluating new private credit commitments, the combination of high yields, corrected property values, and tightened underwriting standards created what was arguably the most attractive entry point since before the pandemic. The key was selecting managers with demonstrable discipline through the 2022 stress period — track record during adversity was the most reliable indicator of future performance.
Closing
February offered the first glimpse of life after the tightening storm. The adjustment was far from over, but the worst appeared to be behind. For Canadian alternative investors, the environment was shifting from defence to selective offence — cautiously, but with reason for measured optimism.
For the full quarterly analysis, see Q1 2023: Banking Crisis and Canadian Resilience.
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