The Slope of the US Yield Curve and Risks to Growth

IMF Blog, July 2, 2019

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Authors: Tobias Adrian, Rohit Goel, Fabio Natalucci
Publication date: July 2, 2019
Topic: Recent inversion of the US Treasury yield curve (long-term debt cheaper than short-term debt) and its implications for future real GDP growth and growth-at-risk.

The slope of the Treasury yield curve is defined as the difference between the interest rate on long-term and short-term debt.
The analysis builds on the October 2018 Global Financial Stability Report and uses the growth-at-risk framework.
Data used: beginning in 1975.
Specific yield measure included in the model: the most recent difference between 10-year and three-month US Treasury yields.

The inversion of the yield curve signals doubts about future growth and points to increased concerns about risks to growth.
Incorporating the yield curve slope into the growth-at-risk model meaningfully changes the distribution of one-year-ahead real GDP growth:
- There is a 5 percent probability that US GDP will shrink 4.6% or more four quarters from now.
- Compared to the baseline distribution (which includes the latest quarterly real GDP growth and an estimated trend), adding the yield curve slope shifts the distribution leftward, increasing the odds of lower growth.
Over the last four decades:
- Median forecasts of GDP growth remain consistently in a relatively narrow range when the slope is included.
- The left tail of the distribution (5 percent “severely adverse” outcomes) decreases significantly ahead of recessions.

The yield curve inversion increases the probability of adverse growth outcomes (a fatter/shifted left tail), indicating elevated downside risk.
Despite heightened left-tail risks, the most likely scenario remains continued positive, albeit somewhat lower, growth.

Source: IMF Blog — Tobias Adrian, Rohit Goel, Fabio Natalucci, July 2, 2019