rates
RECESSION CONCESSION? BOND YIELDS CONVERGE Good news for borrowers: bond yields have fallen to levels that preceded the first of five Bank of Canada rate increases in 2017. More concerning: the gap between short- and long-term yields is virtually non-existent.
The inverted yield curve is an oft-referenced, but not well understood, a phenomenon wherein short-term interest rates (for example, those associated with 2-year Canadian government bonds) rise above longer-term ones (say, 10-year bonds). When this happens, it means that it costs more to borrow today then it does tomorrow, a situation usually associated with rising central bank rates and the end of the business cycle. In Canada, 3 of the past 4 inverted yield curves (as measured by the spread between 2- and 10-year government bond yields) since the early-1980s have preceded a nation-wide recession. Why does this matter now? Quite simply, because the spread between 2- and 10- year bond yields fell to a miniscule 0.04% in May. In fact, the spread between 2-year
yields and those of 3-, 5-, and 7-year bonds has already turned negative. The good news for borrowers is that yields are now much lower than they have been in the recent past, having fallen back to their late-2017 levels. Because this directly impacts fixed-rate mortgage rates, it will ease some of the burden of monthly mortgage payments (for those renewing) and will make it slightly easier to qualify for a new mortgage (for purchasers). convergence, as an inverted yield curve does not necessarily imply a recession is coming. However, with slowing growth and trade tensions abounding, Canada may in fact be walking an economic tightrope over the next couple of years. In any event, no panic is in order at the moment because of the bond yield
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