eResearch> Inversion occurs when a short-term maturity exceeds a longer-term maturity. eResearch monitors various yield curve ratios in both Canada and the United States, and many of them are inverted, and many of them have been inverted for quite a while. An Inversion is an important harbinger of an Economic Recession which, on average, occurs 15-20 months after the Inversion occurs.
In the attached report, we highlight a dichotomy that has occurred between the positive economic indicators currently being experienced in Canada and the negative yield spreads for many Canadian bond maturities. With economic conditions in the USA not showing the same buoyancy as in Canada, maybe because so many U.S. economic indicators are at historic levels and further improvement would be exponentially more difficult to achieve, it is likely, in our opinion, that economic conditions will soften in Canada to mirror those in the USA. It is not likely that Canada can economically out-perform the USA for very long.
Based on our yield curve ratio analysis, we are close to declaring “Inversion!” in Canada, which will initiate a Count-Down to Economic Recession. The situation in the United States for Inversion is not quite so dire but many maturities are also in well-established Inversion territory. The U.S. economic expansion is already at a record-high duration so, eventually, an economic slow-down will occur. Whether or not it is for two quarters of negative GDP growth, the definition of a recession, well, only time will tell. Right now, our U.S. Recession Barometer is at 8.5x, not far off the 10.0x that denotes Inversion.
You can access this week’s Recession Barometer report here: … RB_080219
