Canadian Yield Curve Inversion Reaches Its Deepest Since 2000

(Bloomberg) -- One segment of Canada's government-bond yield curve reached its most inverted level since 2000 as traders added to bets the nation's central bank will wind up cutting interest rates amid global trade tensions.

The 10-year government yield has dived to about 40 basis points below the rate on 3-month bills, after the gap was about even as recently as May. It hasn't been that inverted since December 2000, according to data compiled by Bloomberg based on daily closing levels.

Traders have increased wagers on rates cuts since last week even as inflation remains close to the Bank of Canada's target of 2% and the economy continues to grow. But there's mounting speculation that the Federal Reserve will lower borrowing costs again as soon as next month, and traders are wondering if the BOC will be able to go against the tide.

“The inversion is saying that eventually the central bank will roll over,” and cut rates, said Ryan Goulding, a fixed-income manager at Leith Wheeler Investment Counsel Ltd., which manages about C$21 billion ($15.8 billion), including Canadian government bonds.

Investors in Canadian fixed-income assets are betting Governor Stephen Poloz can't keep rates on hold indefinitely as trade tensions between the U.S. and China have escalated.

While traders still see a limited chance of a rate cut in the next two months, the market is signaling it sees the BOC target at 1.43% in six months, from 1.75% now, data compiled by Bloomberg show.

With Canada's markets catching up to Monday's events after being shut for a holiday, the nation's 10-year yield sank 14 basis points Tuesday to 1.24%, the lowest since November 2016.

“The market has started to price in a rate cut by the Bank of Canada in December or earlier next year,” said Dominique Lapointe, an economist at Laurentian Bank Securities.

--With assistance from Nancy Moran.

To contact the reporter on this story: Esteban Duarte in Toronto at eduarterubia@bloomberg.net

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, Mark Tannenbaum, Chris Fournier

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