What is an inverted yield curve? Here’s why it could mean a ‘bad recession’ for Canada
Global News
The yield on the Canadian 10-year government bond has fallen nearly 100 basis points below the 2-year yield, marking the biggest inversion of Canada's yield curve since 1994.
As the Bank of Canada considers ditching oversized interest rate hikes, it is dealing with an economy likely more overheated than previously thought but also the bond market’s clearest signal yet that recession and lower inflation lie ahead.
Canada’s central bank says that the economy needs to slow from overheated levels in order to ease inflation. If its tightening campaign overshoots to achieve that objective it could trigger a deeper downturn than expected.
The bond market could be flagging that risk. The yield on the Canadian 10-year government bond has fallen nearly 100 basis points below the two-year yield, marking the biggest inversion of Canada’s yield curve in Refinitiv data going back to 1994 and deeper than the U.S. Treasury yield curve inversion.
Some analysts see curve inversions as predictors of recessions. Canada’s economy is likely to be particularly sensitive to higher rates after Canadians borrowed heavily during the COVID-19 pandemic to participate in a red-hot housing market.
“Markets think the Canadian economy is about to suffer a triple blow as domestic consumption collapses, U.S. demand weakens and global commodity prices drop,” said Karl Schamotta, chief market strategist at Corpay.
The BoC has opened the door to slowing the pace of rate increases to a quarter of a percentage point following multiple oversized hikes in recent months that lifted the benchmark rate to 3.75 per cent, its highest since 2008.
Money markets are betting on a 25-basis-point increase when the bank meets to set policy on Wednesday, but a slim majority of economists in a Reuters poll expect a larger move.
Canada’s employment report for November showed that the labor market remains tight, while gross domestic product grew at an annualized rate of 2.9 per cent in the third quarter.
