New York Fed Treasury Spread Model

The New York Fed Recession Model is based on yield curve inversions between the 10-year Treasury Note and the 3-Month Treasury Bill.

I added the highlights in yellow and the dashed red line.

Image placeholder title

The model uses monthly averages.

Smoothed Recession Odds

Image placeholder title

I do not know the makeup of the smoothed recession chart but it is clearly useless. The implied odds hover around zero, and are frequently under 20% even in the middle of recession.

GDP Recession Model

Image placeholder title

The GDP-based recession model is hugely lagging. The current estimate is 2.4%. This model will not spike until there is at least one quarter of negative or near-zero GDP.

Estimated Recession Probabilities

Image placeholder title

Predicting Recessions


The above chart is from the Yield Curve as a Predictor of U.S. Recessions by Arturo Estrella and Frederic S. Mishkin. It is from 1996 so the table may have been revised.

Practical Issues

One might also wish to consider the 2006 discussion the Yield Curve as a Leading Indicator: Some Practical Issues.

With regard to the short-term rate, earlier research suggests that the three-month Treasury rate, when used in conjunction with the ten-year Treasury rate, provides a reasonable combination of accuracy and robustness in predicting U.S. recessions over long periods.

Maximum accuracy and predictive power are obtained with the secondary market three-month rate expressed on a bond-equivalent basis, rather than the constant maturity rate, which is interpolated from the daily yield curve for Treasury securities.

Spreads based on any of the rates mentioned are highly correlated with one another and may be used to predict recessions. Note, however, that the spreads may turn negative—that is, the yield curve may invert—at different points and with different frequencies.

Image placeholder title

Our preferred combination of Treasury rates proves very successful in predicting the recessions of recent decades. The monthly average spread between the ten-year constant maturity rate and the three-month secondary market rate on a bond equivalent basis has turned negative before each recession in the period from January 1968 to July 2006 (Chart1). If we convert this spread into a probability of recession twelve months ahead using the probit model described earlier (estimated with Treasury data from January 1959 to December 2005), we can match the probabilities with the recessions (Chart 2). The chart shows that the estimated probability of recession exceeded 30 percent in the case of each recession and ranged as high as 98 percent in the 1981-82 recession.

Other Spreads

The article mentions "The ten-year minus two-year spread tends to turn negative earlier and more frequently than the ten-year minus three-month spread, which is usually larger."

That is certainly not the case today.

The 2-year yield is 1.882 whereas the 10-year yield is 2.041.

Chalk this up to QE, Fed manipulation, taper tantrums, and hedge funds front-running expected rate cut moves.

Mike "Mish" Shedlock

US Recession Odds Hit 55% According to Deutsche Bank Model

A Deutsche Bank yield curve model says the odds of a US recession are now 55%. Specifically, the model notes the flattening of the yield curve, something I have mentioned numerous times recently.

Fed “Workhorse” Model Says Odds of Recession in Next Year Only 3.56%; What are the Real Odds?

Of all the ridiculous opinions as to why the US is not about to enter a recession, the Fed’s “Workhorse” Model is at the top of the list.

EU Offers UK a Slap in the Face Deal: Assessing the Current Brexit Odds

The EU offered Theresa May a "new" deal, but a quick perusal shows it was a deal that the UK rejected long ago.

Surefire Recession Signal in Pictures

The strength of inversions widened today. That's a strong recession warning, but it is not the actual recession signal.

Housing Consistent With a Recession in 2020

Over the past year, 4 housing indicators have moved in ways consistent with patterns seen in 3 previous recessions.

Nassim Taleb Blasts Nate Silver About Election Odds in Series of Tweets

When it comes to discussion of probabilities, Nassim Taleb’s opinion carries a lot of weight. Taleb is author of the New York Times bestseller The Black Swan: Impact of the Highly Improbable.

Yield Curve Steepens but Recession Risks Haven't Faded

The yield curve has steepened considerably in the past month. Some think it means recession risk has diminished.

Assessing Hillary’s Recount Odds

Salil Mehta, founder of Statistical Ideas comments on Hillary’s recount odds in his post Losers Who Won’t Lose.

First Inversion in Seven Years: Can a Recession be Far Off?

The 5-year to the 3-year portion of the yield curve inverted today. Inversion is typically a prelude to recession.