Free course · Module 10
Inverted Yield Curve and Recessions
Learn what a negative Treasury spread means, calculate it yourself and separate a recession warning from a prediction of when stocks will fall.
Written by the StockEducation Editorial Team · Reviewed by Associate Professor Charles Lo, CPA, PhD · Updated 16 Oct 2026 · How we check lessons
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Read in order, or return to the idea you need.
Idea 1 of 4
Read the curve from short to long.
An inversion means the shorter yield is above the longer yield for the maturities being compared. A yield curve places time to maturity on the horizontal axis and yield on the vertical axis. Specify the maturities before calling it inverted.
Compare the two hypothetical pairs below. With a 3% three-month yield and a 5% ten-year yield, the line slopes upward. Swap those yields and it slopes downward: the ten-year minus three-month spread is negative.
These are two-point illustrations, not a complete Treasury curve. A real curve can bend, and one maturity pair can invert before another.
Spread: +2.00 percentage points
Spread: −2.00 percentage points
The sign describes the pair’s slope; it does not give a recession date.
Ten-year minus three-month or ten-year minus two-year?
“The curve inverted” needs a maturity pair and an observation date.
Idea 2 of 4
Calculate the spread in the right order.
Spread = ten-year yield − three-month yield. On 30 December 2022, the Treasury’s daily par-yield table showed 3.88% at ten years and 4.42% at three months. The difference was −0.54 percentage points, or −54 basis points. Source 3.
The negative sign tells you the longer maturity yielded less on that date. It does not mean either Treasury yield was below zero, and it is not a percentage loss on a bond investment.
Keep levels and differences separate: a yield is expressed as a percent; the difference between two yields is expressed in percentage points or basis points.
Multiply the percentage-point difference by 100: −54 basis points.
Why can daily and monthly readings differ?
Why can the curve invert?
A negative spread is a difference between two yields, not a negative yield.
Idea 3 of 4
Treat the warning as evidence, not a timer.
The yield curve is a leading indicator, not a countdown. A 2006 New York Fed study found its chosen monthly spread had inverted before each recession in its January 1968–July 2006 sample. That dated finding is not a guarantee about every future episode. Source 5.
The New York Fed also publishes a model estimate for recession twelve months ahead. Its estimate is conditional on the model and data; it is not a declaration that a recession has begun. Source 6.
In the US, NBER dates business-cycle peaks and troughs using broader economic evidence. Its recession assessment considers the depth, breadth and duration of a decline, rather than applying a yield-spread rule. Source 7.
An inverted pair
Observe the spread and its persistence.
Broader evidence
Compare jobs, income and activity.
A dated assessment
Read NBER’s business-cycle chronology.
Keep each claim tied to its evidence and observation window.
How should you read the New York Fed probability?
What can historical inversions tell you?
A useful warning can still be a poor market-timing instruction.
Idea 4 of 4
Try the spread and check the context.
Hold the three-month yield at a hypothetical 5%. Move the ten-year yield below, equal to and above it. Calculate long minus short before reading the result.
This exercise classifies one maturity pair. It does not fit the New York Fed model, calculate recession odds or predict a bond or stock return.
Does this Treasury pair invert?
Hypothetical · two yields4.00% − 5.00% = −1.00 percentage points (−100 basis points)
Hypothetical annual yields. Three-month yield fixed at 5%; only the ten-year yield changes. “pp” means percentage points; one percentage point equals 100 basis points. This is not live data, a complete curve, a recession probability or an investment-return calculation.
Build a monthly evidence check
Name the series. Check the dates. Separate the warning from the decision.
Quick check
Three quick checks. Feedback straight away.
The ten-year yield is 4% and the three-month yield is 5%. What is the spread?
Choose an answer to see the explanation.
Does an inversion tell you the exact month stocks will fall?
Choose an answer to see the explanation.
Which comparison is methodologically sound?
Choose an answer to see the explanation.
Review your takeaway card and the learning path
- Name the pair. A curve can invert between selected maturities.
- Subtract short from long. Negative spread means the shorter yield is higher.
- Keep the methods separate. Daily readings, monthly averages and model inputs can differ.
- Use wider evidence. A warning, a probability and a dated recession are not interchangeable.
Reading markers and these practice checks stay on this device. They do not mark the LMS lesson complete.
Sources and assumptions
- FRED: Ten-Year Minus Three-Month Treasury Spread. Daily constant-maturity series; check units and observation date.
- FRED: Ten-Year Minus Two-Year Treasury Spread. A separate maturity pair; do not substitute it into another series’ historical record.
- US Treasury: December 2022 Daily Par Yield Curve Rates. 30 December 2022: three-month 4.42% and ten-year 3.88%; spread −0.54 percentage points.
- FRED: Monthly Ten-Year Minus Three-Month Spread. Monthly constant-maturity spread and history; distinct from daily observations and the New York Fed model’s bill-rate basis.
- Estrella and Trubin: The Yield Curve as a Leading Indicator (2006). Historical sample, policy/expectation channels, model horizon, bond-equivalent bill-rate basis and persistence.
- New York Fed: Recession Probability Predicted by Treasury Spread. Updated model chart. Check the input month, twelve-month-ahead horizon and accompanying methodology; use the linked update for the latest estimate.
- NBER: Business Cycle Dating FAQ. Chronology and assessment of the depth, breadth and duration of economic declines; use current announcements for dated-cycle claims.
Sources checked 16 October 2026. The Treasury example is dated 30 December 2022; the research sample is explicitly historical. All other illustrated yields are hypothetical. No current recession probability, new recession declaration, stock-price forecast or automatic trading instruction is supplied. General education only; check the current primary sources and their methods.
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