Poloz may hold rates steady until mid-2020

TORONTO Canada has joined the U.S. in the inverted yield curve club, signalling a growing risk of recession that may keep Stephen Poloz on hold for his final 14 months as head of Canada’s central bank.

The yield on Canada’s 10-year bond dipped to 1.6 per cent Friday, or six basis points lower than the rate on the three-month Treasury bill.

That hasn’t happened since 2007, at the start of the financial crisis sparked by a housing crash in the U.S.

The so-called inverted yield curves in both the U.S. and Canada reflect concerns that a global economic slowdown will keep the Federal Reserve and the Bank of Canada from raising rates — and may even prompt a rate cut if it worsens.

“A rate cut would require signs that the economy is declining,” said Craig Alexander, chief economist at Deloitte Canada, in a television interview with BNN Bloomberg. Still “the inverted yield curve is troubling. Inverted curves have often been accompanied by recession.”

Yields on government bonds have fallen in recent weeks amid weakening economic data in Canada, including lower than expected growth in the last quarter of 2018.

The Federal Reserve on Wednesday tilted even more dovish and the German bond yield returned to zero Friday as Europe’s largest economy weakens.

“Signs of a global slowdown are real,” said Alexander, who has also worked at the Conference Board of Canada and Toronto-dominion Bank. “This certainly puts the Bank of Canada on hold.”

Investors are buying top-rated government securities in Canada as retail sales unexpectedly fell in January, reinforcing concerns that consumers may no longer be able to drive the economy with household debt at record levels and borrowers facing higher costs following five rate hikes by the Bank of Canada.