What is the 10y-3m spread?

The 10y-3m spread is the 10-year Treasury yield minus the 3-month Treasury bill rate, expressed in percentage points or basis points. It is the New York Fed's preferred yield-curve recession indicator. When the spread turns negative — the long rate falls below the short rate — the curve is 'inverted', a configuration that has preceded every US recession since the late 1960s.

Why does the New York Fed prefer 10y-3m over 2s10s?

The New York Fed prefers the 10y-3m spread because the 3-month bill tracks the current policy rate more tightly than the 2-year note, sharpening the recession signal. Estrella and Mishkin's research found the 10-year-minus-3-month pair maximises out-of-sample recession-forecasting accuracy at roughly a four-quarter horizon, outperforming the 2s10s spread that traders watch more often.

What does an inverted 10y-3m spread mean?

An inverted 10y-3m spread means the 3-month bill yields more than the 10-year note, signalling markets expect the Fed to cut rates as growth slows. The inversion reflects tight current policy relative to long-run expectations. Historically, a sustained inversion has led US recessions by about 12 months, though the lag varies and timing is imprecise.

Why does a marginal positive 10y-3m spread matter in 2025?

A marginal positive 10y-3m spread like 0.16% matters because it marks the early re-steepening after a record 2023-2024 inversion, as the Fed eases the front end. A shallow positive reading is ambiguous: it lifts the acute recession warning but is not yet a robust expansionary signal, leaving the curve's directional message still forming.

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Glossary

10y-3m spread

10-year minus 3-month spread · 10y-3m term spread · 10Y-3M curve · near-term forward spread cousin

The 10y-3m spread is the difference between the 10-year Treasury yield and the 3-month Treasury bill rate, a yield-curve gauge the New York Fed favours as a recession predictor. A negative reading (inversion) has preceded every US recession since the late 1960s.

How it works

Subtract the 3-month bill yield from the 10-year note yield. The 3-month leg tracks the current policy stance closely, so the spread compresses and inverts when the Fed hikes the front end above long-end expectations. The Estrella-Mishkin work at the NY Fed found this pair maximises recession-forecasting power at a roughly four-quarter horizon.

Why it matters now

After a record-length inversion through 2023-2024, the 10y-3m spread has been re-steepening as the Fed eases the front end; a marginal positive reading like 0.16% signals the recession-warning has lifted but the curve's directional signal is only beginning to reform in the 2025-2026 cutting cycle.

Example

In the 2022-2024 tightening cycle the spread inverted sharply: with the 3-month bill near 5.4% in mid-2023 after the Fed funds target reached 5.25-5.50%, and the 10-year around 3.8%, the 10y-3m spread sat near −160bp — one of the deepest inversions on record. As the Fed began cutting in September 2024, the front end fell and the spread climbed back toward positive territory, reaching a marginal +0.16% — the kind of shallow positive reading that marks the early phase of curve normalisation rather than a robust expansionary signal.

Mechanism

10y-3m spread = 10-year Treasury yield − 3-month Treasury bill yield (in percentage points or basis points)

How desks use it

Reading recession probability via the NY Fed's term-spread model at a four-quarter horizon
Distinguishing front-end-driven inversion from long-end term-premium shifts
Tracking curve re-steepening as the Fed cuts the policy rate in 2025-2026

Key moves

2022-1010y-3m spread inverts as Fed hikes front end above long-end expectations during the 2022 tightening cycle.
2023Spread reaches near −160bp, among the deepest inversions on record, with 3-month bills above 5.4%.
2024-09Fed begins cutting; front end falls and the spread climbs back toward positive territory.

Frequently asked

What is the 10y-3m spread?: The 10y-3m spread is the 10-year Treasury yield minus the 3-month Treasury bill rate, expressed in percentage points or basis points. It is the New York Fed's preferred yield-curve recession indicator. When the spread turns negative — the long rate falls below the short rate — the curve is 'inverted', a configuration that has preceded every US recession since the late 1960s.
Why does the New York Fed prefer 10y-3m over 2s10s?: The New York Fed prefers the 10y-3m spread because the 3-month bill tracks the current policy rate more tightly than the 2-year note, sharpening the recession signal. Estrella and Mishkin's research found the 10-year-minus-3-month pair maximises out-of-sample recession-forecasting accuracy at roughly a four-quarter horizon, outperforming the 2s10s spread that traders watch more often.
What does an inverted 10y-3m spread mean?: An inverted 10y-3m spread means the 3-month bill yields more than the 10-year note, signalling markets expect the Fed to cut rates as growth slows. The inversion reflects tight current policy relative to long-run expectations. Historically, a sustained inversion has led US recessions by about 12 months, though the lag varies and timing is imprecise.
Why does a marginal positive 10y-3m spread matter in 2025?: A marginal positive 10y-3m spread like 0.16% matters because it marks the early re-steepening after a record 2023-2024 inversion, as the Fed eases the front end. A shallow positive reading is ambiguous: it lifts the acute recession warning but is not yet a robust expansionary signal, leaving the curve's directional message still forming.

Recently in the wire

The Steepening, Not the Inversion, Is the TellBriefing · rates-fx
- Why Common Recession Indicators Are Misleading Today— The Compound
- Seven Macro Charts: Yield Curve, AI & Productivity, Wealth Distribution, U.S. Debt, USD, and Consumer Sentiment— Maverick Equity Research

Sources

The Yield Curve as a Leading Indicator — Federal Reserve Bank of New York
The Predictive Power of the Yield Curve across Countries and Time — Federal Reserve Bank of New York