The interest rate spread between 10-year Treasury bonds and the federal funds rate is the difference in yields between the long-term government debt and the overnight rate for interbank lending.

It’s considered a predictor of economic activity.

A widening spread typically indicates that investors demand a higher return for long-term investment risk, suggesting expectations of inflation or economic growth.

A narrowing spread, or a flattening yield curve, can signal investor pessimism about long-term prospects and potentially precede a recession.

Recession Signal

The interest rate spread is an important aspect of the LEI because it reflects the yield curve and is believed to predict the turning points in the economic cycle.

A normal, upward-sloping yield curve, where long-term rates are higher than short-term rates, is associated with positive future economic growth.

In contrast, an inverted yield curve, where long-term rates fall below short-term rates, has historically preceded economic recessions.

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