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Do not become obsessed with the Canadian yield curve



The US bond market continued to send warning signs about the health of the economy Wednesday, but investors in Canada should not reach the panic button yet. Unlike its US counterpart, Canadian bond market signals have an uneven track record to predict issues ahead.

"How useful is Canada's yield curve as a forecast for recessions? Not much is the bottom line," concluded a Nova Scotia bank's report.

The yield curve compares the returns on long-term bonds with short-term bonds and has been flat for some time in both Canada and the US, as long-term bond yields have declined over the past four months.

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But the US yield curve invaded Friday when three-month US government bonds yielded more than 10-year government bonds, and it triggered a wave of comments from economists and market researchers who believe inversions often predict recessionary.

In the US, the yield curve was inverted before the last seven downs, including the major recession of a decade ago.

The Canadian yield curve has also been reversed since Friday and adds concerns that this economic indicator may indicate that the Canadian economy is also facing a hard patch already.

No wonder the stock markets have been unea sewing in recent days. S & P 500 fell almost 2 per cent. On Friday. Benchmark index waved again on Wednesday: It fell as much as 1.1 per cent. In the midday trade, which ended the day with 0.5%, as the inversion became deeper during the recent series of dissuasive global economic news.

The US trade deficit narrowed in January as a result of a larger than expected fall in imports that could signal weaker domestic demand. The yield on the 10-year US government bond fell to a 15-month low reflecting the growing belief that the US Federal Reserve will not raise its key figures this year. The Canadian benchmark 10-year bond also fell to its lowest level since 2017 and hovered just over 1.5 percent.

"There are two conflicting stories here. One is that the Fed and the global central banks keep the interest rate on hold and it creates a very supportive background," said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York.

"The second story is they are doing this because they expect weakening and that the next step is a global recession," says Mr. Goldberg.

In fact, concerns are global. said Wednesday it could delay the increase in its key figures, New Zealand's central bank left its key interest rate unchanged and signaled that its next move could be an interest rate level, raising concerns about developments in developed markets.

In China, industrial enterprises surplus 14% in January and February compared to the same two-month period a year ago, according to capital economy.

But Nova Scotia's note noted that the Canadian bond market is an area where investors might include some historical perspective

Derek Holt, Head of Capital Market Economy in Scotiabank (assisted by Alena Bystrova) took two different d efinitions of a recession – back-to-back quarterly decline in gross domestic product and cd & # 39; a more comprehensive definition – and then on different parts of the Canadian yield curve to see if inversions were accurate predictors.

For the 10-year bond and 3-month bill conversion that is causing all the busy US bond market right now, the recession has suffered a weak track record.

The inversion signaled a recession in the early 1990s. But it gave false positives (it inverted without a subsequent recession) in 1986 and 2000. It also failed to predict a recession in 2015 (there was no inversion).

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The conversion prior to the financial crisis is also open to debate: Inversion took place in 2006, or well ahead of Canada's short recession, noted Holt.

What about when the two-year bond yields more than the 10-year bond? This part of the yield curve has a similar story: It predicted a recession in the early 1990s; it inverted in 1986, 1998 and 2000 without a subsequent Canadian recession; and it failed to see the upcoming recession in 2015. "The curves are worse predicting for the Canadian business cycle than the US curves," Holt said in a note.

One thing is clear, though: The US bond market is rattling stocks and Canadian stocks are hardly immune.

Recession Predictor

Recession

Defined as

] back-to-back quar-

terly decline in

gross domestic product

product

GLOBE AND MAIL, SOURCE: Scotiabank

Finance; Bank of Canada; CD Howe

Canada's Curve is not a Great

Recession Predictor

Ten-Year Yield minus 90-Day Yield

Withdrawal

Defined as

back to back quarterly

fell gross

] domestic product

GLOBE AND MAIL, SOURCE: Scotiabank Economics;

Bank of Canada; CD Howe

Canada's Curve is not a Good Recession Predictor

Ten-Year Yield minus 90-Day Yield

Recession

Defined as back-to-back

quarterly decline in gross

domestic product

] GLOBE AND MAIL, SOURCE: Scotiabank Economics; Bank of Canada; CD Howe

With files from Reuters


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