Is the yield curve still significant?

Long seen as a fundamental recessionary warning sign, an inverted yield curve is losing credence in a Canadian economy that keeps growing, says Avi Hooper, portfolio manager at Invesco

Ruth Saldanha 12 June, 2019 | 7:28AM
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Ruth Saldanha: Economists are watching the yield curve closely as last week it inverted again. Many are predicting the inversion as a sign of an impending recession. But Avi Hooper, Portfolio Manager at Invesco, disagrees. He is here with us today to discuss his point of view.

Avi, thank you so much for being with us today.

Avi Hooper: Thanks very much for having me here.

Saldanha: What are some of the implications of this yield curve inversion, especially for Canada?

Hooper: Well, we think that the yield curve is really overstating the fundamental backdrop for Canada's economy. There are many lead and lag time periods between this inversion and the implications for the economy. But today, our view for the Canadian economy is one of continued growth, not recession. Because overall Canada's economy faces headwinds from a high level of household debt as well as the recent growing trade tensions in the global economy. That said, job creation is very strong, wages are rising, and they are rising faster than the cost of servicing that high level of household debt.

The other aspect and we think the bigger driver of the yield curve inversion is actually a more technical point that global investors sitting in Europe, in Japan, that are facing negative yields locally are looking globally for high-rated countries, including Canada, which is AAA-rated. Now, at Invesco, we're not investing in the Federal government yield curve, because there's hundreds of yield curves in Canada and across the world. We are finding opportunity in the provincial and even more so in the municipal Canadian bond space where yield curves in fact are not inverted. In fact, they've been steepening. So, at Invesco Fixed Income, we've been extending maturities in both provinces as well as Canada's largest cities, Vancouver, here in Toronto and in Montreal, where we can enhance returns by extending maturity, adding upwards of 1% per year to client portfolios.

Saldanha: What makes some of these provincial yields so attractive?

Hooper: Well, one aspect is fundamentals. These are very well-run engines of growth in Canada's economy. These three largest cities are creating 74% of all jobs across the economy. So, fundamentally, they are very strong. They are well-managed, fiscally balanced budgets and they offer steeper yield curves which for clients means higher yields for a very similar quality of overall risk that you can get by lending to the Government of Canada.

Saldanha: Finally, what are some of the risks that you see for the Canadian economy going ahead?

Hooper: Well, certainly, we talked about high levels of household debt. How has that been driven? It's come from rising house prices in these three major cities in Canada. But we take a more optimistic view. Canada is creating very high value-added jobs and particularly in the technology sector where wages are rising the most. They are attracting a global pool, a very talented labor. And so, while nominal house prices we think are certainly over-valued and could decline in the near term, we think that this backdrop of rising wages in these growth sectors in Canada are more likely to see us grow into the current valuation in house prices.

Saldanha: Thank you so much for joining us today, Avi.

Hooper: Thanks for having me here.

Saldanha: For Morningstar, I'm Ruth Saldanha.

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Ruth Saldanha

Ruth Saldanha  is Editorial Manager at Follow her on Twitter @KarishmaRuth.


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