Definition
The yield curve plots the interest rates of Canadian government bonds by their maturity (3 months, 1 year, 2 years, 5 years, 10 years, 30 years). It reflects market expectations for monetary policy and future inflation.
Curve shapes: - **Normal (upward sloping)**: long bonds yield more than short bonds — compensation for duration risk. Usual situation. - **Flat**: short and long rates are close — signal of economic uncertainty. - **Inverted**: short rates exceed long rates — classic signal of imminent recession. In Canada, an inversion of 2-year/10-year rates preceded the recessions of 1990, 2001, 2008 and 2020.
Mortgage impact: 5-year fixed rates are closely tied to 5-year government bond yields. When the curve flattens or inverts, variable rates may exceed fixed rates, favoring fixed-rate borrowers.