TORONTO (Reuters) - Inversion of Canada's yield curve by the most in nearly two decades is threatening to coerce the Bank of Canada to cut interest rates rather than risk an economic downturn, portfolio managers said on Wednesday.
Curve inversion (that is, when long-term yields fall below short-term yields) is seen by investors as a prelude to recession. It can also be a source of damage to the economy and lead to a reduction in banks' stimulus to borrowing and giving and discouraging investors to invest in long-term projects leads to growth.
"The Bank of Canada can't ignore what's happening in debt markets and the inversion of the yield curve," said Sal Guatieri, a senior economist at BMO Capital Markets. "It's so highly inverted now, a reduction in policy rates would at least provide some semblance of normality."
Reversal of the Canadian yield curve occurred as the yield on the 10-year US Treasury tipped 2.1% below the 2-year US Treasury yield on Wednesday.
The Bank of Canada lowered the overnight borrowing cost to 1.75% in July, saying it was a good set of challenges given the recovery of the domestic economy.
But Canadian long-term rates, which are affected by changes in the global bond market, fell below short-term rates. On Wednesday, 10-year yields traded around 20% below two-year returns, the deepest reversal since May 2000.