What Moved
The US Federal Reserve held rates at 2.25-2.50% at its June meeting but dropped the word "patient" from its statement and signaled that rate cuts were likely ahead. The dot plot showed a majority of Fed officials expecting lower rates by year-end. Markets rallied sharply on the news (Fed, Jun 19, 2019).
The Bank of Canada held at 1.75% on May 29, maintaining its cautious stance. Canadian economic data was mixed — employment remained solid, but business investment was tepid and trade uncertainty persisted (BoC, May 29, 2019).
In housing, mid-year data showed a market that had largely stabilized after the stress test adjustment. National home sales were up modestly from 2018 lows, though still well below 2016-2017 peaks (CREA, Jun 2019).
Private credit markets were active. Mortgage investment corporation origination volumes remained strong, and several fund managers reported their highest first-half capital inflows on record. The yield advantage over traditional fixed income continued to drive investor interest across the Canadian alternative investments landscape.
What It Means
The Fed's pivot toward rate cuts had significant implications for Canadian private markets, even before any BoC action.
First, it put downward pressure on longer-term Canadian yields. The Canada 10-year yield fell below 1.5% in June — compressing the return available from conventional bonds and widening the relative attractiveness of private credit. When GICs pay 2% and government bonds yield 1.5%, a mortgage investment corporation offering 7% becomes more compelling, provided investors understand the trade-offs in liquidity and risk. The math was straightforward, but the due diligence required to distinguish quality MIC operators from weaker ones was anything but.
Second, the prospect of lower rates globally was supportive of asset prices — including real estate. For private real estate investors and development lenders, lower borrowing costs improve project economics and support property valuations.
Third, the divergence between the Fed (cutting) and BoC (holding) was creating a Canadian dollar dynamic worth monitoring. A weaker US dollar environment could support commodity prices, benefiting Canadian energy and resource-linked PE investments.
What We're Watching
The Fed's July meeting was expected to deliver the first rate cut since 2008. Whether the BoC would follow was the key question for Canadian fixed-income and private credit investors.
Summer housing data would indicate whether lower rate expectations were translating into renewed buyer activity. Any acceleration in housing demand would directly support private lending volumes and MIC performance.
Canadian PE mid-year deal statistics from CVCA would provide a read on whether trade uncertainty was dampening transaction activity or if domestic-focused deals were compensating.
Closing
The mid-year mark brought a notable shift in the global rate narrative. For Canadian private market investors, the direction of travel — stable to lower rates — was supportive of both private credit yields and real estate valuations. The second half of 2019 would reveal how quickly that shift translated into market activity.
For the full quarterly analysis, see Q2 2019: Waiting for Direction.
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