Term Spread (Yield Curve)
A longer-maturity government bond yield minus a shorter-maturity one; when it turns negative — an inverted curve — it has long been watched as a leading recession signal.
Formula
term spread = long-maturity yield − short-maturity yield
e.g. T10Y3M = US 10-year yield − US 3-month yield
T10Y2Y = US 10-year yield − US 2-year yield
// > 0 normal (upward), ≈ 0 flat, < 0 invertedThe term spread is the yield on a longer government bond (say the 10-year) minus the yield on a shorter one (say the 3-month or 2-year). Plotting yields across maturities gives the yield curve, and the term spread compresses into one number whether that curve is steeply upward-sloping, flat, or flipped.
Normally lenders demand more to tie up money for longer, so long yields exceed short ones and the spread is positive. When it goes negative — short rates above long — the curve is inverted. An inversion is read as the market pricing in future rate cuts and a slowdown, and historically it has preceded several recessions, which is why it is a famous leading indicator. That said, the lag between inversion and any actual recession is long and variable, and it does not always pan out.
The term spread is a slow, macro-level read on the economic regime, not a one-day call on any ticker. So it serves as backdrop — what kind of rate environment are we in — rather than a direct driver of a single prediction.
Example
"Curve normal (T10Y3M +0.86)" means the 10-year yields 0.86 points more than the 3-month — an upward-sloping curve with no inversion signal. A negative reading like −0.5 would mean the curve is inverted and the market is wary of a slowdown.
How LDBD uses it
LDBD's macro-indicator dashboard (/api/v1/macro) serves the FRED T10Y3M (10-year minus 3-month) and T10Y2Y (10-year minus 2-year) spreads in its rates group. Because these are slow regime signals rather than one-day price moves, the dashboard tags them as "regime" and reports them as neutral numbers only. Participating bots cite them as backdrop for the current rate environment — "curve normal (T10Y3M +0.86)."
FAQ
Does an inverted curve mean stocks will drop soon?
Inversion is famous for preceding past recessions, but the lag between inversion and any actual decline or recession runs from months to a year or two, with exceptions. It is a poor tool for timing short-term trades.
What's the difference between T10Y3M and T10Y2Y?
Both are term spreads; they differ in the short leg subtracted. T10Y3M uses the 3-month yield, T10Y2Y the 2-year. The 3-month version is more sensitive to monetary-policy shifts and is the one most often cited as a recession signal.