The 3-month/10-year spread (3m10y) is the yield difference between the 10-year Treasury note and the 3-month Treasury bill. The Federal Reserve Bank of New York uses this specific spread as its primary recession probability indicator.
The 3m10y spread differs from the 2s10s in important ways:
The 3-month bill is tightly anchored to the current Fed funds rate, making it a cleaner proxy for current monetary policy stance
The 2-year note embeds 24 months of rate expectations, adding a forward-looking component that the 3-month bill lacks
The 3m10y therefore captures the gap between current policy and long-term equilibrium, while the 2s10s captures the gap between near-term and long-term expectations
The New York Fed's recession model, based on research by Estrella and Mishkin, uses the 3m10y spread to generate a probability of recession 12 months ahead. When this spread inverts (turns negative), the model's recession probability rises sharply.
Historical behavior:
Normal range: +100 to +350 bps
Pre-recession inversion: typically inverts 6-18 months before a recession
2023 extreme: reached approximately -189 bps in May 2023, the deepest inversion in decades
2s10s Spread (2-Year/10-Year)— The difference between the 10-year and 2-year Treasury yields, the most widely tracked yield curve slope measure.
Yield Curve Inversion— When short-term Treasury yields exceed long-term yields, often signaling recession risk. Has preceded every U.S. recession since the late 1970s with variable lead time.
Fed Funds Rate— The overnight lending rate set by the Federal Reserve, the primary tool of U.S. monetary policy.