Wall Street executives believe that tightening in the U.S. Treasury Department’s yield curve is a sign that a recession could hit as soon as 2020, Gunnar Blix, deputy chief economist of Equifax, told Auto Finance News.
The yield curve is a tool economists use to track the strength of the economy by following the difference between short-term and long-term interest rates on government bonds. The shrinking difference between two-year and 10-year Treasury rates indicates that investors have little confidence in the near-term economy and are demanding more yield for a short-term investment.
Hikes in the Federal Reserve Bank’s interest rates often mean consumers must pay a higher rate on their auto loan, which could dampen car finance demand, an element that could contribute to slowing economic growth. The yield curve constantly changes, but the trend over recent years has been towards a “flat” curve at 0% spread, Blix said.
At press time, the difference between two-year rates and 10-year rates is 8.7% — compared with a 50.1% spread at this time last year, according to the Treasury’s data.
The curve has not yet inverted — which occurs when short-term rates are greater than the long-term rates — but fiscal policy is tightening and closer to a possible inversion. Inversions have preceded the past five recessions since 1980, according to the Federal Reserve Bank of St. Louis. Additionally, “after the yield curve inverted, recessions happen an average 18 months after,” Blix said.