rates
YIELDS BONDED IN THEIR RISE We’re not in inverted yield curve territory yet, but there is reason to expect an economic slowdown after a robust pandemic recovery.
Investors who fear risk seek bonds—and more specifically, government bonds, which are deemed to be about as risk-free an investment as there is in Canada. They also typically have relatively low returns (hey, you get what you pay for). Bonds really did return absurdly low levels over the past year-plus, with 2-year Government of Canada bonds yielding only 0.16% in January 2021, down from 2.33% in October 2018 (the recent high). Similarly, 10-year bond yields dipped in December 2020 to 0.7% (as in, give me $1,000 for 10 years
and for that privilege I will pay you $7 (!) annually over that period). The spread, or difference, between these rates is often seen as indicative of what lies ahead for our economy. When short-term yields (like the 2-year ones) are higher than the longer-term ones (the 10-year), the so-called “yield curve” is said to be inverted—a sign of a looming economic slowdown or recession. In Canada we flirted with that scenario in early-2020, and though we’re not there now, this is something to watch as uncertainty clouds our economic picture over the coming couple of years.
DO BONDS YIELD INSIGHTS INTO OUR ECONOMIC FUTURE?
3.0%
2.5%
2.0%
1.97% 1.57%
1.5%
1.0%
0.5%
0.40%
0.0%
-0.5%
-1.0%
GOC BENCHMARK YEAR BOLD YIELDS
GOC BENCHMARK YEAR BOND YIELDS
YEAR YEAR YIELD SPREAD
SOURCE: BANK OF CANADA DATA: YIELDS ON 10-YEAR & 2-YEAR GOVERNMENT OF CANADA BONDS, MONTHLY
22
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