During a period of economic uncertainty, investors often move from riskier assets to safer investments like Government of Canada bonds. How would this shift likely impact the yield curve?

Question: During a period of economic uncertainty, investors often move from riskier assets to safer investments like Government of Canada bonds. How would this shift likely impact the yield curve?

Answer options: ✅ It would likely cause an inversion, where short-term yields exceed long-term yields.

• It would likely cause a steepening, where the spread between long-term and short-term yields increases.
• It would likely cause a flattening, where the spread between long-term and short-term yields decreases.
• It would have no significant impact on the shape of the yield curve, only on individual bond prices.

Correct answer: It would likely cause an inversion, where short-term yields exceed long-term yields.

Explanation: Economic uncertainty often leads to an 'inversion' of the yield curve because investors flee to the safety of long-term government bonds, driving their prices up and yields down, while short-term rates may remain relatively high or even rise due to tighter monetary policy or inflation concerns, reflecting a market expectation of a recession.