What Moved
The Bank of Canada had no scheduled decision in May, holding at 5.00%. Pre-cut positioning intensified as the market committed fully to a June cut, and the pricing reflected it. Bond yields continued to decline, pulling mortgage rates lower and improving the financing outlook across the economy.
Canadian CPI for April came in at 2.7% — within the target range and continuing its steady decline. The data reinforced the case for the June cut and reduced any remaining uncertainty about the Bank's next move (StatsCan, May 2024).
Housing activity was improving ahead of the cut. May sales volumes exceeded expectations in several major markets, as buyers who had been waiting for the signal moved early. The combination of lower bond yields and imminent BoC easing was generating genuine momentum (CREA, May 2024).
Private credit markets were in an unusual sweet spot: yields on new originations remained near cyclical highs (reflecting the 5.00% base rate still in effect), while forward conditions were improving (rate cuts would ease borrower stress). This combination — high current income with improving fundamentals — was historically attractive.
What It Means
May was the last month of the 5.00% environment, and private credit investors were making the most of it. New MIC originations at base rates just below 5.00%, with conservative LTVs and strong borrower quality, represented the peak of the current vintage's attractiveness.
The window for peak-rate private credit deployment was closing. Once the BoC began cutting, yields on new originations would decline gradually. Investors who had deployed capital during the 5.00% period — from July 2023 through May 2024 — had captured the best risk-adjusted returns of the cycle.
For housing, the pre-cut positioning was creating a virtuous cycle: improving buyer confidence led to more transactions, which supported prices and gave sellers confidence to list, which increased inventory and created a healthier market. This was exactly the orderly recovery that both the BoC and private market participants were hoping for.
PE sponsors were using the final pre-cut period to finalize deals and close transactions. The expectation of lower financing costs over their holding period strengthened deal underwriting and improved projected returns. The CVCA noted that dry powder levels among Canadian PE funds remained at near-record highs, providing significant firepower for deployment once the easing cycle formally began. This capital overhang suggested that deal activity could accelerate sharply once the rate environment confirmed the market's expectations.
What We're Watching
The June 5 BoC decision was five days away. All eyes were on the Bank. A 25bp cut to 4.75% was the consensus — but the Bank's forward guidance would determine whether this was the start of a gradual easing or a more aggressive cutting cycle.
Housing data for the spring selling season was the domestic barometer. A strong spring would set up a healthy second half of the year.
US inflation and Fed policy were the global variables. A synchronized global easing cycle would amplify the benefits for Canadian markets.
Closing
May was the calm before the easing. The pieces were in place, the data supported the move, and the market was ready. For those invested in Canadian alternative investments, it was a moment to appreciate the full arc — from the emergency cuts of 2020, through the boom, the tightening, the stress, and now the beginning of recovery. The cycle was about to turn.
For the full quarterly analysis, see Q2 2024: The Pivot Arrives.
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