Is the flattening yield curve a cause for concern?

Though it may not be signaling that a recession is imminent, central banks should proceed with caution.

Karen Wallace 24 September, 2018 | 5:00PM

The yield curve started 2018 sort of flat. And, as you can see from the chart below, Canadian short-term yields have risen from where they were six months ago, but long-term yields continue to be sluggish. Should we be concerned about this?


- source: www.worldgovernmentbonds.com

In a "normal" yield curve, short-term yields are lower than long-term yields, because you would expect to be compensated for taking on more risk in the form of longer bond maturity.

When the yield curve flattens, the spread between shorter-term bonds and bonds of longer maturities shrinks. This is often measured as the spread or difference between the yield on the 10-year government bond and the 2-year bond. At the start of 2017, the spread was 0.97, and as of Friday it was 0.24. A similar move can be seen in U.S. interest rates as well.

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About Author

Karen Wallace

Karen Wallace  Karen Wallace, CFP® is Morningstar’s director of investor education.

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