rates
IT’S NOT THE NEW NORMAL, BUT THE YIELD CURVE REMAINS INVERTED Long-term interest rates are supposed to be higher than short-term ones. This begs the questionofwhyCanada’s interest rate landscape remains flipped on its head.
When the inverted yield curve was introduced as an indicator we were watching in the Q3 2019 rennie landscape, there was not the expectation that it would also feature in the following editions. Yet, here we are. To succinctly recap, when longer-term interest rates fall below their short-term counterparts historical experience suggests that recessionary conditions may not be far off. Curious then that Canada’s yield curve has remained inverted for the past nine months
while the national economy has continued to grow (albeit at a relatively slow pace). The expectation is that short-term rates will fall in the near-term, thereby “normalizing” the yield curve. This process would be Central Bank-led, with policy rates being pushed down to stimulate economic activity and head off a recession. In this context, one might choose to view the currently-inverted yield curve in the same way as the annual Perseid meteor shower: with fascination but no fear that disaster looms.
THE PESKY YIELD CURVE INVERSION PERSISTS
5.00%
4.00%
3.00%
2.00%
+1.21%
1.00%
0.00%
-0.33%
-1.00%
-2.00%
-3.00%
-4.00%
INTEREST RATE DIFFERENTIAL
LONG RUN AVERAGE
SOURCE: STATISTICS CANADA DATA: CANADIAN 10-YEAR GOVERNMENT BOND YIELD MINUS 3-MONTH TREASURY BILL
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