Yield Curve (10Y-3M Spread)

This version of the yield curve is the 10-Year Treasury yield minus the 3-Month Treasury bill yield, capturing the slope of the curve from its very shortest end to its intermediate point. The 3-Month bill tracks the federal funds rate even more closely than the 2-Year does, which makes this spread the most direct measure of how current monetary policy compares with the market's longer-run growth and inflation expectations. When the spread turns negative, the 3-Month yield exceeds the 10-Year — an inversion at the front of the curve that has long been treated as a powerful recession-related signal.

The non-obvious framing, and the reason this measure deserves special attention, is that the 10Y-3M spread is the version the Federal Reserve Bank of New York actually uses in its widely cited recession-probability model. While the 10Y-2Y spread gets more popular coverage, much of the formal academic and central-bank research on the predictive content of the yield curve centers on the 10Y-3M. It is, in a sense, the economists' yield curve — closely tied to the policy rate that the Fed directly controls, and therefore an especially clean read on whether current policy is restrictive relative to the long-run outlook.

A positive spread means the 10-Year yield exceeds the 3-Month bill — the normal, upward-sloping configuration in which long money pays more than short money. A narrowing spread signals that the market is growing cautious or that the Fed is pushing the very short end up through rate hikes. An inversion, when the spread goes negative, means the 3-Month bill yields more than the 10-Year — a sign that current policy is restrictive relative to the market's longer-run expectations, and historically a precursor to economic weakness.

Because the 3-Month bill hugs the policy rate, this spread inverts mainly when the Fed has pushed short rates well above where the market expects them to settle over the next decade. As with the 10Y-2Y curve, the lead time between inversion and any subsequent downturn has been long and variable, and the un-inversion — when the curve re-steepens as the Fed cuts — has often aligned more closely with the onset of weakness. The level fed into the New York Fed's model is this spread, which is why analysts watch its sign and depth so closely.

The short leg, the 3-Month bill, is driven almost entirely by current Fed policy and near-term expectations, tracking the federal funds rate with very little lag. That tight link is what gives this spread its distinctive character: it is more directly a measure of the current policy stance than the 10Y-2Y curve, whose short leg embeds two years of policy expectations. The long leg, the 10-Year yield, reflects longer-run growth and inflation expectations plus a term premium, just as it does in the other curve measure.

The spread therefore inverts when the Fed raises the short end sharply while long-run expectations stay anchored, signaling that policy has moved into restrictive territory relative to the future the market envisions. Because the 3-Month leg responds so promptly to actual rate decisions, this spread can invert later than the 10Y-2Y — which can begin pricing future cuts in the 2-Year leg before the bill moves. That timing difference is exactly why comparing the two curves is informative, and why a divergence between them is itself worth noting.

Like the 10Y-2Y curve, the 10Y-3M spread has inverted ahead of US recessions across the modern era, and the body of research backing its predictive content is substantial — work associated with the New York Fed found the 3-Month-to-10-Year spread to be a particularly robust leading indicator, which is why it anchors the bank's recession-probability model. Inversions preceded the downturns of the early 1990s, 2001, and 2008, each time with a lag before the economy actually turned.

In the early-2020s tightening episode, the 10Y-3M spread inverted deeply once the Fed had raised the policy rate far enough for the 3-Month bill to climb above the 10-Year, producing one of the more pronounced inversions on this measure in decades. Notably, the 10Y-3M sometimes inverts a little later than the 10Y-2Y, because the bill only rises as the Fed actually acts, whereas the 2-Year can front-run policy. Watching the two together has historically given a fuller picture than either alone.

The series above is FRED series T10Y3M, computed as the 10-Year Treasury constant maturity yield minus the 3-Month Treasury constant maturity yield, published every business day in percentage points. The 10-Year leg uses the same constant-maturity methodology as the other benchmarks, while the 3-Month leg is the constant-maturity yield on the shortest standard Treasury bill — the instrument that tracks the policy rate most closely. Subtracting the short from the long isolates the slope across this wide span of the curve.

A reading above zero means the curve is upward-sloping from the bill to the 10-Year; a reading below zero means it is inverted at the front end. Because the 3-Month leg is so tightly bound to current policy, this spread is the cleanest curve-based measure of whether the Fed's stance is restrictive relative to the long-run outlook. Its construction is what makes it the preferred input for formal recession-probability work — a simple difference of two yields that nonetheless carries unusually strong historical predictive content.

The 10-Year leg of this spread is the 10-Year Treasury Yield chart, and the short leg is governed by the Federal Funds Rate, which the 3-Month bill tracks closely. Comparing the spread with the policy rate shows directly how tightening is feeding into front-end inversion. The closest sibling is the Yield Curve (10Y-2Y spread), which swaps the 3-Month bill for the 2-Year Treasury Yield as its short leg; reading the two side by side reveals whether the market is already pricing future cuts in the 2-Year before the bill has moved.

That divergence between the two curves is genuinely informative: when the 10Y-2Y inverts but the 10Y-3M has not yet, it often means the market expects cuts that the Fed has not yet delivered. The Real Interest Rate, the 10-Year TIPS yield, helps interpret whether the long end is anchored by low real rates or low inflation expectations. Together with the 2-Year, 10-Year, and policy charts, the 10Y-3M completes MacroRadar's map of how monetary policy transmits across the term structure.

The macro-regime panel above places the current reading in context, because this spread's meaning depends on where policy and the cycle stand. An inversion here has historically reflected a clearly restrictive policy stance relative to the long-run outlook, since the 3-Month bill only exceeds the 10-Year once the Fed has pushed short rates high enough; a re-steepening as the Fed eases has historically aligned more closely with the onset of weakness. The regime framing helps situate whether the front of the curve is inverting, deepening, or normalizing.

This is context, not a forecast, and MacroRadar does not present the spread as a prediction of recession timing, despite its role in formal probability models — its lead times remain long and variable. The purpose of overlaying the regime is to see whether the current front-end slope is consistent with the prevailing policy and growth backdrop or diverging from it, and to compare it with the 10Y-2Y curve. Read alongside the related charts, the 10Y-3M becomes a contextual gauge of policy restrictiveness, not a stopwatch.

For long-term investors, the 10Y-3M spread matters because it is the curve measure with the strongest formal research pedigree as a recession-related indicator and the cleanest read on whether current policy is restrictive. Its starring role in the New York Fed's recession-probability model gives it particular credibility, and watching it alongside the 10Y-2Y curve provides a fuller, more robust picture of cycle risk than either spread alone. When the two diverge, that gap itself carries information about what the market expects the Fed to do.

The takeaway is the same humility the broader yield curve demands: treat the 10Y-3M as a regime indicator with long, variable lead times, not as a timing tool. It tells you something real and well-documented about cycle risk, but on its own schedule. MacroRadar uses curve measures as key inputs to its regime model and presents this spread as context — paired with the macro regime above and the related yield and policy charts — to frame cycle risk for a long-horizon plan. Treat it as one durable input among many. This is a historical indicator, not investment advice.