Bank of Canada's 1-Month Term Repo Reintroduction and Implications for Mortgage-Backed Securities Markets

The Bank of Canada's reintroduction of 1-month term repos of National Housing Act Mortgage-Backed Securities (NHA MBS) in October 2025 marks a pivotal shift in its balance sheet normalization strategy. This move, first suspended in March 2020 to stabilize liquidity during the pandemic, reflects the central bank's broader effort to recalibrate monetary policy tools amid evolving market dynamics. By reintroducing these repos, the Bank aims to enhance liquidity in the MBS market, diversify collateral options, and address short-term funding imbalances that have emerged as quantitative tightening (QT) unwindsBank of Canada updates terms and conditions governing term repo operations, [https://www.bankofcanada.ca/2025/09/bank-canada-updates-terms-and-conditions-governing-term-repo-operations/]^[1].

Strategic Asset Allocation in a Shifting Policy Landscape

The reintroduction of 1-month NHA MBS repos directly impacts strategic asset allocation for market participants. These repos provide institutions with a structured mechanism to manage short-term liquidity needs while reducing reliance on less efficient funding channels. For instance, the inclusion of NHA MBS as collateral expands the range of assets eligible for repo transactions, enabling banks and other financial institutions to optimize their balance sheetsRepo market strains return as Bank of Canada winds down QT, [https://www.canadianmortgagetrends.com/2025/09/repo-market-strains-return-as-bank-of-canada-winds-down-qt/]^[3]. This aligns with broader global trends, such as the U.S. TBA market's success in reducing basis risk through standardized repo structuresImproving Efficiency in the NHA MBS Market, [https://thecmigroup.ca/press-room/improving-efficiency-in-the-nha-mbs-market-lessons-from-the-us/]^[5].

Moreover, the Bank's decision to separately conduct NHA MBS repos underscores its recognition of the unique characteristics of mortgage-backed assets. Unlike government securities, MBS carry prepayment and credit risks, which can complicate liquidity management. By isolating these operations, the Bank allows participants to allocate capital more precisely, mitigating potential distortions in broader repo marketsMitigating Market Risk: Effective Strategies for …, [https://www.centraleyes.com/mitigating-market-risk-effective-strategies-for-success/]^[2]. This segmentation also enables the Bank to fine-tune its interventions, ensuring that liquidity is directed where it is most needed.

Liquidity Management and Systemic Resilience

The reintroduction of 1-month NHA MBS repos is part of a larger toolkit to stabilize short-term funding markets. Recent strains, such as elevated overnight repo rates in September 2025, highlighted vulnerabilities in liquidity provision as QT progressedRepo market strains return as Bank of Canada winds down QT, [https://www.canadianmortgagetrends.com/2025/09/repo-market-strains-return-as-bank-of-canada-winds-down-qt/]^[3]. The Bank's $12 billion repo operation during this period demonstrated its willingness to step in during stress, but such ad hoc measures are not sustainable long-term solutions.

By institutionalizing 1-month NHA MBS repos, the Bank creates a predictable framework for liquidity management. This is particularly critical for mortgage lenders and securitization platforms, which face seasonal cash flow fluctuations. For example, the 28-day term aligns with typical mortgage origination cycles, allowing institutions to hedge temporary mismatches between asset and liability maturitiesTerm Repos - Bank of Canada, [https://www.bankofcanada.ca/markets/market-operations-liquidity-provision/market-operations-programs-and-facilities/term-repos/]^[6]. Additionally, the Bank's participation in the Canadian Collateral Management Service (CCMS)—a tri-party repo facility—further enhances efficiency by streamlining collateral usage and reducing operational frictionsBank of Canada to use domestic triparty repo facility CCMS, [https://finadium.com/bank-of-canada-to-use-domestic-triparty-repo-facility-ccms/]^[4].

Risk Mitigation and Market Participant Behavior

Market participants are already adapting to these changes. A survey of North American chief risk officers (CROs) revealed that institutions are prioritizing scenario analysis, enhanced crisis management, and revised risk models to navigate the shifting landscapeBank of Canada updates terms and conditions governing term repo operations, [https://www.bankofcanada.ca/2025/09/bank-canada-updates-terms-and-conditions-governing-term-repo-operations/]^[1]. The reintroduction of NHA MBS repos complements these efforts by providing a reliable liquidity backstop, reducing the need for precautionary capital buffers.

Financial institutions are also leveraging derivatives and Value at Risk (VaR) models to hedge against interest rate and prepayment risks inherent in MBS portfoliosMitigating Market Risk: Effective Strategies for …, [https://www.centraleyes.com/mitigating-market-risk-effective-strategies-for-success/]^[2]. The Bank's inclusion of inflation-linked bonds in regular term repos adds another layer of flexibility, enabling participants to hedge against inflationary pressures while maintaining liquidityBank of Canada updates terms and conditions governing term repo operations, [https://www.bankofcanada.ca/2025/09/bank-canada-updates-terms-and-conditions-governing-term-repo-operations/]^[1]. These strategies reflect a proactive approach to risk management, aligning with the Bank's goal of fostering resilient financial systems.

Conclusion: A New Era for Canadian MBS Markets

The Bank of Canada's 1-month NHA MBS repos represent more than a technical adjustment—they signal a strategic pivot toward a more nuanced and adaptive monetary policy framework. By reintroducing these tools, the Bank not only addresses immediate liquidity needs but also lays the groundwork for a more efficient MBS market. For investors, this means opportunities to refine asset allocation strategies, leverage structured liquidity, and mitigate risks in an environment where monetary policy normalization is no longer a distant prospect but an ongoing reality.

As the Bank continues to evaluate adjustments—such as increasing operational frequency or introducing new terms—the focus will remain on balancing stability with flexibility. In this context, the 1-month NHA MBS repo is not an endpoint but a catalyst for broader innovation in Canada's financial infrastructure.