Danger: Yield Curve Is Giving Us Economic Warning Signs

Canada’s yield curve is looking very scary. It has almost completely inverted and this is typically an indicator of coming recession.

An inverted yield curve occurs when short-term bond yields are higher than long-term yields.

Fear creates this situation. Lower returns are expected.

Borrowers, worried about liquidity issues, become desperate for capital in the short-term that they will pay higher rates for a 90-day loan than a 30-year loan. Lenders fear falling interest rates so they bid up the price for long-term bonds, lowering the long-term yield further.

This combination of factors inverts the yield curve, which is otherwise “normal” in the sense that longer-term rates are higher due to inflation and risk.

 

yield curve

 

This is a warning to our fellow Canadians. Consider locking in some long-term rates before they fall further and shift some more assets to cash.

 

 

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