U.S. and Canadian benchmark 10-year government bond yields declined again Monday, and the yield curve between three-month Treasury bills and 10-year notes in both countries inverted further, as traders remained focused on deteriorating economic growth prospects.
The yield curve in both countries inverted on Friday after disappointing manufacturing data in the United States and Germany further raised concerns about the slowing global economy. Meanwhile, Canada reported weak inflation numbers and its third consecutive monthly decline in retail sales.
The 10-year Canada yield, which touched its lowest intraday level since June, 2017, at 1.532 per cent, traded 4.4 points further below the yield on the 3-month T-bill.
In the United States, the yield curve between three-month notes and 10-year yields was inverted by about five basis points Monday.
“It is a follow through trade from last week,” said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets in New York.
The inversion, if it persists, is seen as a reliable indicator that a recession is likely in one to two years.
Short-term interest rates are nearly always lower than long-term rates. On the rare occasions when that pattern has inverted over the past 60 years in the United States, and it has cost governments more to borrow money for shorter periods than for longer ones, a recession has often followed within a year or two. The spread between three-month bills and 10-year Treasuries has inverted before each of the past seven recessions, according to Bloomberg.
Typically, however, the curve will chop around for some time before confirming an economic downturn.
Unprecedented central bank stimulus may have also altered the curve dynamics, making an inversion a less clear signal of economic weakness than in the past.
“We’re examining yield curve relationships in an environment where the Fed still has enormous control over the long end of the curve, given how much they own on their balance sheet, and we’re dealing with a very accommodative global policy regime as well,” said Tom Simons, a money market economist at Jefferies in New York.
Chicago Federal Reserve Bank President Charles Evans said on Monday it was understandable for markets to be nervous when the yield curve flattened, although he was still confident about the U.S. economic growth outlook.
U.S. 10-year notes gained 18/32 in price to yield 2.393 per cent, down from 2.455 per cent on Friday. Canadian government bond prices were higher across the yield curve in sympathy with U.S. Treasuries. The two-year rose 8.5 Canadian cents to yield 1.488 per cent and the 10-year climbed 34 Canadian cents to yield 1.558 per cent.
The U.S. Treasury Department will sell US$113-billion in coupon-bearing supply this week, including US$40-billion in two-year notes on Tuesday, US$41-billion in five-year notes on Wednesday and US$32-billion in seven-year notes on Thursday.
Reuters, with files from The Globe and Mail