"...First, a quick refresher (or intro) to Canada Mortgage Bonds (CMBs). Lenders originate mortgages, pool them, then sell the pool as mortgage backed securities (MBS) to the government. To pay for the MBS, the government sells CMBs to investors to get the funds. The cash flow from the MBS, is then used to pay investors holding the CMBs. In other words, a CMB is a state-backed security for mortgage financing in Canada. Easy, right? Totally obvious, and I’m sure you got that on the first read.
These influence the cost of borrowing based demand for these bonds. When investor demand for CMBs rises, interest paid to investors falls. When demand falls, interest paid should rise. It’s a simple concept based on demand of the free market, which changes based on the risk environment. Except in a country that may have a housing bubble. Then when demand evaporates due to risk – the state steps in..."
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