What Is The Yield Curve Telling Us Now?

Friday's Employment Data in both Canada and the US were both quite positive (although one month's data never tells the whole story because it is subject to revisions), but the bond market adjusted and the yield curves can tell us a great deal about future expectations:

US and Canada:

• the difference between US and Canadian interest rates at a specific maturity date is called the "spread".
• The Spread tells us that investors in bonds (in this case, US Government Bonds) want a higher yield over a Government of Canada Bond for a similar maturity date because they expect a higher rate of inflation (brought on be stronger economic growth) in the future.
• No surprises here! Expectations of a stronger US economy and a less strong Canadian economy.

The US Yield Curve:

• after Fridays employment data, the US curve moved significantly higher beyond the 3 year point, signalling an eventual return to higher yields, but the nearer end of the curve is signalling that change (higher interest rate expectations from the FED) is still some way off.

The Canadian Yield Curve:

• after the BOC cut the bank rate in late January, the front end of the Canadian Curve inverted slightly, suggesting the potential for a short, shallow recession. 
• Following Friday's employment data, the curve has flattened in the front end , suggesting that while slowing of economic growth will still likely happen in the near-term, it may not be recessionary.
• Longer-term (and more importantly), the slope of the curve remains positive, which signals an eventual return to growth.

There is always new and revised data continuously being presented to the market on a daily basis. As the bond markets digest this data, the yield curves will adjust, giving us key insight as to what expectations are being built in to current economic thinking.

The views expressed are those of the author, Scott Tomenson, a Raymond James Financial Advisor, and not necessarily those of Raymond James Ltd. It is provided as a general source of information only and should not be considered to be personal investment advice or a solicitation to buy or sell securities. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor's circumstances and risk tolerance before making any investment decision. The information contained in this blog was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. Raymond James Ltd. is a member of the Canadian Investor Protection Fund