A fabled recession indicator worth watching The shape of the yield curve – that is, the spread remained slightly positive. These moves were seen in between long- and short-term interest rates – is a hot Canada too. It pays to watch movements in the yield topic these days. When long-term rates are below curve, because if it inverts, this compresses inter- short-term rates, the yield curve is said to be “invert- est rate margins and makes lenders less willing to ed,” and a potential signal that a recession is not far extend credit. That would have a knock-on effect for off, with the typical lag around 18 months. While the business activity. Business loan growth in Canada spread between two- and five-year U.S. Treasuries accelerated in 2018, so we’ll be watching to see if inverted in early December, a more accurate gauge, that trend continues this year. the spread between two- and 10-year Treasuries, When the U.S. yield-curve turns negative, a recession has followed Spread between 10-year and 2-year yield, in basis points 300 250 200 150 100 50 0 -50 -100 -150 -200 -250 19 199 1982 1985 1988 1991 199 199 2000 2003 200 2009 2012 2015 2018 Source: US Treasury, NBER, RBC Economics Research Source: US Treasury, NBER, RBC Economics Research It pays to watch movements in “ the yield curve, because if it inverts, this compresses interest rate margins and makes lenders less willing to extend credit. ” RBC Economics Research | Navigating 2019 - 9 big insights for the year ahead | January 2019 3