Poloz Unruffled by Flat Yield Curve He Says Is Driven by Demand

(Bloomberg) -- Flat yield curves are the result of huge demand for long-term bonds rather than a signal of anything worrying in the economy, according to Canada’s central bank governor.

Pension funds and other asset managers are buying up long-term bonds in oversubscribed deals as trade tensions make equities more risky, Governor Stephen Poloz said. That’s keeping 30-year yields depressed while short-term rates are rising as central banks start to normalize monetary policy.

“I don’t interpret the flattening of the yield curve as a warning sign,” as we would in more conventional times, Poloz said at a press conference after the Bank of Canada increased interest rates for the fourth time in a year. “The most likely explanation to me is that the appetite for long-dated product is absolutely huge.”

Poloz Unruffled by Flat Yield Curve He Says Is Driven by Demand

The long end of Canada’s yield curve briefly inverted for the first time in a decade in May when the yield on the country’s 10-year bonds rose above 30-year yields. The difference between two-year and 30-year bonds was at a decade low of 23 basis points on Wednesday after the Bank of Canada increased rates by a quarter point to 1.5 percent.

An inverted yield curve, with short-term rates trading above long term bonds, typically portends a recession as the market bets central bank tightening will bite in the immediate term while cooling inflation.

©2018 Bloomberg L.P.