Yield Curve Expectations Reflect Historic Economic Optimism

The election of Joe Biden as president, and prospects of an effective vaccine against the Coronavirus, has produced great optimism for a significant economic rebound in 2021. Expectations of a steepening yield curve (chart below), a reflection of economic growth, have recently risen to unprecedented highs.

Extremes of sentiment always give us pause, and this is particularly so considering the potential damage that the current second wave of the pandemic can impose on the global economy before a vaccine becomes widely administered. As well, we expect the pandemic to produce permanent changes to the economy that will slow an eventual economic rebound.

Lastly, previous highs in enthusiasm for a steepening curve have occurred just prior to growing economic concerns resulted in a flatter yield curve.

We remain of the view that investors should be prepared for a “double-dip” recession and its possible effects on capital markets.

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