Yield Curve On Canadian Bonds Inverts Amid Trade Tensions

The yield curve on Canadian government bonds has inverted the most since early 2007 as investors move money into bonds.

Canada’s 10-year yields plunged to trade 17 basis points less than three-month notes, according to data compiled by Bloomberg. The 10-year yield fell five basis points to 1.51%, the lowest in two years.

An inverted yield curve, in which short-term rates are higher than longer-term yields, is considered by some economists a signal that a recession is looming. The inverted yield curve comes as investors transfer money into bonds over concerns that U.S. President Donald Trump's threat to impose tariffs on Mexican imports could derail the revised North American Free Trade Agreement (NAFTA).

Trump announced last week that he plans to impose a 5% tariff on imports from Mexico to force the Latin American nation to bolster efforts to stop illegal immigration. The move came just hours after Vice President Mike Pence promised to approve the U.S.-Mexico-Canada Agreement (USMCA) this year, in a meeting in Ottawa with Prime Minister Justin Trudeau.

The increased trade tensions threaten a Canadian economy that is showing signs of emerging from its first-quarter slump. The economy grew by 0.5% in March, topping estimates, after an expansion of just 0.4% for the first three months of the year, Statistics Canada reported last Friday.