What Moved
The Bank of Canada held at 0.25% on July 15 and released its Monetary Policy Report, projecting a sharp GDP contraction of approximately 7.8% for 2020 followed by a strong recovery in 2021. As investors refined their post-COVID investing strategy, the Bank signaled that rates would remain at the effective lower bound for an extended period (BoC, Jul 15, 2020).
Canadian housing continued to surprise. July sales were up 26% year-over-year nationally, with Toronto and the surrounding regions leading. The pandemic-driven shift toward suburban and exurban housing was now clearly visible, with smaller markets seeing exceptional demand (CREA, Jul 2020).
The TSX had now recovered roughly 75% of its March-to-February losses. The rally was broadening beyond the technology sector that had led the initial recovery, with financials and industrials participating.
In private credit, MIC managers reported stabilizing conditions. Borrower defaults remained below worst-case projections, supported by government programs and the housing recovery. Several MIC managers resumed normal distribution payments after brief reductions in Q2.
What It Means
The BoC's commitment to extended low rates was reshaping the investment landscape in real time. With the overnight rate at 0.25% and likely to stay there for years, the yield available from traditional fixed income was nearly zero. GIC rates had fallen below 1%. Government bond yields were negligible.
For income-seeking investors — particularly retirees and others dependent on investment cash flow — this created a stark choice: accept near-zero yields from traditional sources, or move further into Canadian alternative investments to maintain income levels. This dynamic would drive substantial capital flows into MICs, private credit funds, and private REITs over the coming quarters.
The housing acceleration was also creating opportunities and risks for private lenders. More transactions meant more origination volume. Rising prices supported existing collateral. But the speed of the price increases — and the FOMO-driven buying behaviour emerging in some markets — warranted caution. The best lending opportunities were not necessarily the most aggressive.
What We're Watching
The pace of housing acceleration was worth monitoring carefully. If prices continued to rise at the current pace, affordability would deteriorate and the risk of a correction would increase — relevant for private lenders and development financiers.
Mortgage deferral data heading into the fall would be critical. Banks had granted deferrals to hundreds of thousands of borrowers, and the six-month window was approaching expiry.
PE deal activity was slowly restarting after a near-complete shutdown in Q2. The second half of 2020 would show whether sponsors were finding opportunities in the dislocated environment.
Closing
By July, the Canadian private markets had navigated the acute crisis and settled into a new equilibrium. The environment was unusual — near-zero rates, government stimulus, and accelerating housing — but private credit was performing and capital was flowing. The question was no longer about survival, but about what kind of market these conditions would create.
For the full quarterly analysis, see Q3 2020: The V-Shaped Illusion.
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