Canada's central bank is discussing abandoning excessively high interest rates. This bond market signal portends a recession and weakening inflation.
The Bank of Canada announces the need to slow down the overheated economy in order to reduce inflation. However, if the tightening measures are exceeded, a deeper recession than expected could be triggered.
The bond market may indicate this risk. The largest inversion of the Canadian yield curve since 1994 is evidenced by the 10-year Canadian government bond yield falling about 100 basis points below the yield of 2-year ones. Meanwhile, the inversion of the U.S. Treasury yield curve is less profound.
The inversion of the yield curve is seen by some analysts as a sign that a recession is approaching. As the number of large loans to participate in the overheated housing market has increased during the coronavirus pandemic, it is expected that the Canadian economy will be quite sensitive to high rates.