Displacement measurement based on a continuous-wave (CW) sensor suffers from frequency-dependent signal distortion that is caused by harmonics generated by nonlinear phase modulation. Analysed is the signal distortion problem in AC-coupled CW radar sensors, which may lead to false signal demodulation but has been neglected in the past. It is found that the signal distortion comes from the loss of spectrum characteristics as the signal goes through the AC-coupled receiver chain. Both simulations and experimental results show that the ribbon-like signal distortion decreases as the target motion frequency increases. Furthermore, a guideline for solving the frequency-selective distortion issue in continuous-wave radar displacement sensors is presented.