What Moved
On June 5, the Bank of Canada delivered its first rate cut since the emergency reductions of March 2020, lowering the overnight rate by 25 basis points to 4.75%. The Bank cited declining inflation, economic slack, and growing confidence that inflation was on a sustainable path back to target (BoC, Jun 5, 2024).
Canadian CPI for May came in at 2.9%, reinforcing the Bank's decision. Inflation had been within the 1-3% target range for several consecutive months, and core measures were cooperating (StatsCan, Jun 2024).
Markets reacted positively. The TSX rose, bond yields adjusted, and mortgage rates began their downward adjustment. The rate cut was widely expected, but confirmation still provided a psychological boost.
Housing activity improved following the cut. While the 25bp reduction was modest, its signal value was significant — buyers who had been waiting for confirmation of the easing cycle began moving. June sales volumes reflected early improvement (CREA, Jun 2024).
Private credit markets responded constructively. Borrower stress was marginally reduced, and the improved sentiment supported both lending activity and portfolio performance.
What It Means
The first cut — covered in detail in our event-driven analysis — was a milestone that marked the beginning of a new phase for Canadian private markets. After 475bp of tightening over 16 months and a year at the peak, the direction of rates was now unambiguously downward.
For private credit investors, the cut was positive on multiple fronts. Existing portfolios benefited from reduced borrower stress and improved refinancing conditions. The outlook for collateral values improved as lower rates supported housing prices. And investor sentiment toward the asset class improved as the macro environment became more constructive.
New origination yields would begin declining gradually — but the adjustment was slow. At 4.75%, the base rate was still historically high, and private credit spreads remained healthy. The 2024 origination window was narrowing but not yet closed.
For PE, the first cut was catalytic. Deal activity accelerated as sponsors gained confidence in improving financing conditions over their investment horizons. The easing cycle would support portfolio company performance, exit valuations, and the overall PE return profile. Notably, the cut also provided a confidence boost to limited partners who had been cautious about new commitments — fundraising conversations that had stalled during the hold period began to move forward with renewed momentum.
What We're Watching
The pace of subsequent cuts would determine how quickly conditions normalized. The July BoC decision was expected to deliver another 25bp cut — but the Bank's data-dependence meant nothing was guaranteed.
Housing recovery trajectory through the summer would show how strongly the market responded to easing. A robust recovery would support private credit and real estate values.
The US Federal Reserve's approach to rate cuts was a key global variable. If the Fed began cutting in September (as markets expected), synchronized global easing would amplify the benefits.
Closing
June 5, 2024, will be remembered as the day the easing cycle began — the bookend to March 2, 2022, when the tightening started. For the broader landscape of Canadian alternative investments, it marked the beginning of a recovery that patience and discipline had earned.
For the full quarterly analysis, see Q2 2024: The Pivot Arrives.
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