Canadian yield curve inverts dramatically after new U.S. tariffs: report

Yields on Canada’s 10-year government bonds are trading at 17 basis points less than three-month bonds, a report from Bloomberg says, marking the most significant yield curve inversion since 2007.

Investors have moved money to bonds in recent weeks, seeking safe assets as the U.S.-China trade war escalated. U.S. 10-year Treasury yields were at their lowest this week since September 2017 and the German equivalent is in negative territory.

U.S. President Donald Trump’s threat on Thursday to impose a 5% tariff on Mexican imports amplified the concern as Canadian investors worried about the fate of the new NAFTA deal, Bloomberg reported.

Short-term bond yields exceeding those of longer notes is often considered a sign of a coming recession.

Trump’s threat came a day after legislation to ratify the amended trade deal was introduced in Parliament, and only hours after Vice-President Mike Pence discussed the new NAFTA with Prime Minister Justin Trudeau in Ottawa.

In a report on Friday, CIBC chief economist Avery Shenfeld said the added uncertainty that comes with tariffs are a “clear and present danger to global growth.”

“What’s roiling markets is not that the White House is engaged on the trade file, it’s the non-transparent and capricious manner in which protectionist tools are being deployed,” he wrote.

In a speech Thursday, Bank of Canada deputy governor Carolyn Wilkins noted the inverted yield curve.

“These developments partly reflect a change in tone by many central banks and, possibly, investor appetite for long-term, fixed-income assets,” she said. “They nonetheless also reflect a concern about the prospects for growth that is not reflected across other asset classes. We continue to be attentive to these signals.”

Read the Bloomberg article here and the CIBC report here. Carolyn Wilkins’ speech is here.

Staff

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