The United States isn’t the only country that has seen its yield curve invert.
Canada’s yield curve has inverted by the most in nearly two decades, and that fact is putting pressure on the Bank of Canada to cut interest rates rather than risk an economic downturn, say industry analysts and economists.
Curve inversion, when long-term yields dip below short-term ones, is seen by some investors as a harbinger of an economic recession. It could also be a source of damage for the economy, reducing the incentive for banks to lend and the motivation for investors to take on long-term projects.
The recent inversion of Canada’s yield curve came as the yield on the U.S. 10-year Treasury note fell 2.1 basis points below two-year Treasury yields, sparking fear in global markets. The Bank of Canada left overnight borrowing costs on hold at 1.75% in July and said it was comfortable with that stance given the domestic economy’s current strength.
The Bank of Canada’s position has put it at odds with many other central banks around the world. But Canadian long-term rates, which are linked to moves in the global bond market, have since fallen further below short-term rates. Last week, the 10-year yield traded at about 20 basis points below the two-year yield, its deepest inversion since May 2000.
