rates
02. rates
Somewhat surprisingly, Canada’s yield curve remains inverted as most economic signals are flashing green.
THE PERSISTENCE OF CANADA’S INVERTED YIELD CURVE
If someone asked us what the words or terms of the year were for 2019 we might choose “quid pro quo” (don’t worry, we’re not going there), recession, or inverted yield curve. In some respects, the inverted yield curve was only brought to the collective attention of the mainstream this past year, as interest rates began to change in unexpected ways in advance of what many predicted would be a recession (and a nasty one at that). As with hours worked, the yield curve (which describes interest rates associated with government bonds with varying terms to maturity and, under normal conditions, slopes upward) is thought by many to have predictive powers when it comes to recessions. In a nutshell, it’s said if conditions are such that short-term interest rates rise above longer- term ones—generating the dreaded inverted yield curve—economic trouble is on the horizon. This is because the greater risks associated with longer-term investments
should be complemented by higher returns than those associated with shorter-term investments that have inherently fewer risks (such as inflation eating away returns). When the yield curve is inverted, investors are essentially saying they feel pessimistic about future economic performance. Here in Canada, we have been experiencing an inverted yield curve (10-year minus 3-month yields) continuously since March 2019. Some recent normalization is evident, with the inversion sitting at only 0.19% in November, down from a high of 0.49% in August. With the Bank of Canada sitting tight with respect to its overnight target rate, GDP and labour market continuing to grow (albeit slowly), and some signs that the various international trade tiffs may be waning, we expect the yield curve to normalize within the next couple of months.
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