Why this matters: Real estate professionals need an understanding of the principles for market forecasting based on available data, to guide their practice and advise clients on transactions during different phases of the business cycle — especially now as national governance influences wide ranging uncertainty in California’s real estate market.
Know how your market evolves
The yield spread is a tool you use as an agent to form an opinion about future real estate demand and pricing by forecasting the likelihood of a recession one year forward. The yield spread is a figure representing the percentage point difference between interest rates in two bond market tiers:
- long-term interest rate on the 10-year Treasury note, determined by bond market participants worldwide; minus the
- short-term interest rate controlled by the Federal Reserve (the Fed).
The resulting spread figure is either positive or negative, as it is always calculated by subtracting the short-term interest rate from the long-term interest rates.
The yield spread figure ran negative for most of 2024, indicating a coming recession likely by 2026. However, the trade wars of early 2025 caused investor attitude about investment opportunities to change course, bringing volatility to the 10-year T-Note rate. Now in 2026, the rate has hit 5%, a high not seen in two decades.
For mortgage-funded home buyers, when the 10-year T-Note rate rises, the price they can pay for real estate declines. The connection to pricing is the FRM rate of interest is set on the 10-year T-Note rate plus a risk premium margin of between 1.5% and 3%.
The yield spread figure became zero before gradually going positive, averaging +0.98 in August 2026. This spread is likely to remain for several months now that the Fed started to raise the 3-month rate they control in mid-September 2026.
2024’s profoundly negative yield spread was near its lowest level since 1981, when the Fed was waging its last acute battle against inflation and the economy was tilting into a deep recession.
Today’s slightly positive yield spread of 1.0 percent is the result of:
- the questionable low position of short-term interest rates set by the Fed to control consumer inflation and job growth in 2024 and 2025; and
- long-term rates heading higher as bond market investors see an increasing likelihood of uncontrolled inflation and excessive wage increases.
Until mid-September 2026, the Fed delayed an increase in the 3-month rate, believing the current high inflation was a one-off jump that will self-correct after the current effects of tariff and military wars are behind us. Only when the Fed senses high inflation and wage increases have become a long-term problem will they raise the fed rate.
But pressure to slow the growth in inflation and wages mounted as the long-term bond market put rates about 5%. But the rise in bond rates drove the Fed to initially fight inflation by raising the short-term rate.
Meanwhile, real estate markets are nearly 45 months into their own recession due to:
- a decade plus of increasing FRM rates since 2013 (except for the “one-off” pandemic stimulus);
- a stagnant MLS inventory without SFR owner willingness to sell or drop asking prices — on top of insufficient residential construction; and
- the unrelenting cooling of the property market after mid-2022.
Updated September 17 2026. 
Chart update 9/17/26
| August 2026 | December 2025 | August 2025 | |
| Yield Spread | +0.98 | +0.86 | +0.15 |
Reading the chart and current trends
In the above chart:
- The blue line tracks the yield spread from January 1954 through today.
- The yield spread dips below zero — going negative — when the short-term rate rises above the long-term rate. This is the inversion point.
- +1.21 is the point at which the probability of recession begins, as calculated by NY Fed economists in the late 1970s. A yield spreads smaller than +1.21% predicts a greater probability of a recession one year forward.
Each time since 1960 when the yield spread went negative, we were in a recession approximately 12 months later.
We are going to see by the end of 2026 either a further increase or tapering off of consumer inflation and job growth. The Fed is the primary influencer by its inaction or actions, respectively, for the direction the economy will take.
The current state of the economy and issues around Fed action has an identical tone with the 1971 election year. At that time, the Fed failed to raise their fed rate, and inflation kept rolling uncontrolled up to 13% annually, until shut down by the Fed in the period of 1980-1983.
In the fall of 2026, we will see whether the Fed actively or passively fights inflation. Either way, the 10-year T-Note and FRM rates will rise well into 2027 which acts to cool the economy, and thus inflation.
Confidence about what 12 months will bring
To you stalwart members of the real estate profession, a gift: the ability to forecast the probability of future recessions and rebounds, one year forward. This famed and reliable crystal ball is the yield curve spread, also simply called the yield spread.
Again, the yield spread figure is the difference between two key interest rates:
- 10-year Treasury note (T-Note) rate (or long-term rate) set by bond market investor outlook; minus the
- 3-month Treasury bill rate (or short-term rate) set by the Federal Reserve (the Fed) activity.
Don’t let the name yield spread put you off. It is not related to the deceptive yield spread premium (YSP) kickback mortgage lenders paid brokers in times before MLO regulations.
The yield spread reflects economic conditions as interpreted by Fed and bond market investors. When the Fed acts unacceptably, the bond market investors react to force the Fed to change its behavior. The key word here is ‘interpreted’ as both the Fed and the bond investors are concerned about inflation and economic stability.
The yield spread figure is generated, on the one hand, by the Fed using its short-term rate to combat unacceptable inflation in consumer prices and wages. On the other hand, you have the collective wisdom of global investors who set the 10-year Treasury note rate based on long-term inflation expectations.
The two positions are diametrically opposed economic perspectives but still seek the same end result for inflation. But only the Fed uses its action or inaction to consistently maintain their monetary policy of 2% annual consumer inflation. The bond market, once they determine the present and forward rate of inflation is increasing, merely increases the interest rate they demand to include the anticipated rate of inflation.
Related chart:
The short-term market rate
The initial piece of information needed to calculate the yield spread is the interest rate on the 3-month Treasury bill. This interest rate is influenced exclusively by the Fed as the base price of short-term borrowing. It is the Fed’s primary tool for keeping the U.S. economy balanced.
The Fed has direct control over this short-term rate through its Federal Funds Rate. The Fed can:
- lower interest rates and stimulate economic growth to stave off deflation and economic stagnation; or
- raise interest rates and slow economic growth to fight inflation and excess demands for labor.
Collectively, the Fed’s use of short-term interest rates and other infusions and withdrawals of dollars to control the economy is known as monetary policy.
Related article:
The long-term market rate
To make a real profit on their long-term investments, bond market investors generally consider how the Fed’s current monetary policy will impact the future performance of consumer inflation rates. These millions of world-wide individual and institutional investors forecast future economic conditions, characterized as the wisdom of the crowd.
These forecasts are reflected in the 10-year T-Note bond market rates, which are a ready gauge for determining future market conditions (and mortgage rates).
These 10-year T-Note investors consider two discrete elements for the interest rate they demand:
- their desired fixed rate of return on the investment before adjustments for inflation risks, called the real rate of return;
- perceived future rate of inflation, called the inflation risk premium; and
- collectively, the two rates are built into the 10-year T-Note rate which is otherwise considered risk free.
Interplay between the treasury rates = the yield spread
Calculating the yield spread is simply a matter of subtracting the 3-month T-Bill rate from the 10-year T-Note rate. Never the other way around.
Generally, a low or declining yield spread indicates a less vigorous economy one year forward, the outlook of the crowd. A declining yield spread is a result of bond market investors seeing less future growth resulting from the Fed’s short-term rate activity and other economic interruptions or stimulus — the global economy’s relationship to ours.
On the flip side of an economic cycle, a higher or rising yield spread indicates a more vigorous future economy. While good for bond market investors who park their money in bonds or shift their cash into investment opportunities for profit, a too-high yield spread (and its resulting boom) suggests the danger of an increase in consumer inflation and excessive wage growth.
When the spread is unacceptably high, the Fed acts to curtail the growth of future jobs and stabilize consumer prices by initially raising short-term rates — which reduces the spread.
An over-correction by the Fed raising short-term interest rates too high has the potential to send the yield spread into low or negative levels. When the yield spread goes negative for a period of around four months, called an inversion, a recession follows 12 months later. Most recessions are Fed initiated to reduce economic distortions. Periods of pandemics and wars bring on recessionary periods by themselves which are chaotic in behavior.
A yield spread inversion is the result of the:
- bond market envisioning a future downturn in the economy; and/or
- Fed raising short-term interest rates to correct consumer inflation by tightening money market conditions.
An inversion moment in the yield spread gives the real estate broker and agent a signal to adjust their business services to meet a likely change in consumer behavior. At the crossover into a negative yield spread, agents can expect a reduced volume in sales, lending and leasing one year forward.
Then, in a further 12 months, a drop in prices, mortgage rates and rents are experienced. This 12-month delay after sales volume turns downward is the result called the sticky price phenomenon, brought about by money illusions held by sellers and landlords.
Related chart:
Real estate’s stake
Going forward, more and more brokers and agents will learn and apply the workings of the yield spread as a gauge of the economy’s direction for the coming 12 months. Only then, with this insight as advice, will industry-wide frenzies to over-build, over-price and over-acquire property of all types be tempered.
Brokers and agents who track the yield spread glean the foresight needed to shift their advice given to clients and personal spending before the changes in the market actually occur.
In doing so they will seek out recession-proof niches of real estate in which to weather the economic storm, such as:
- seller-in-foreclosure sales and short sales;
- services needed for lender owned real estate (REO) sales;
- MLO endorsement for originations due to refinancing at lower FRM rates;
- an escrow department;
- property insurance department;
- notary service; or
- property management.
Related chart:
Buyer Purchasing Power Index (BPPI) hints at rising as home price adjustment sets in
I appreciate your extremely illuminating response.
I didn’t read anything in this piece that indicates a recession is imminent or approaching in the next 6 months. The pandemic uprooted a lot of chart forecasters.
after the curve in march 2020 we see again it’is going under the 0?
does it mean another correction?
After learning about the Yield Spread, its pisses me off once again that the Alan Greenspans and Hank Paulsons of the world were telling us everything was great and our economy would continue to boom and 1 minute later, we crashed. I’m now wondering what Yield Spreads were they looking at? Just a thought.
we see another curve going uinder the 0 in 2021
Things are different this time. A large part of the world is near zero growth, and government treasuries are negative yield in many countries. This makes our 10 year treasury unusually attractive, and explains the low rate on the long side of the equation,
If the 10 year rate was at historical levels given our rate of growth in the economy, your recession indicator would be flashing green instead of red.
Sorry to disappoint you, but it is different this time. No recession in 2020.
“but it is different this time.” – Famous last words.
Sorry but we’re DEFINITELY going into recession 1st 1/2 2020. The moron and his birdbrain sycophants don’t know which way is up, penze also gonna be impeached and removed AND, even the IDIOT greenspan couldn’t predict previous recession despite having all his data, charts and info. Lest one forget, it’s all about confidence and most Americans are fed up with the rigged system, including health care, stock market riggings by feds, skyrocketing rents, cost of food, student loans and day to day struggles of the average Joe + Jane just to pay bills and survive.
CASH IS KING!!!
Maybe the air is bad in Concord, or Mike has merely failed to read the clear article by the Journal staff analyzing basic facts. The Journal consistently lays down the facts and soberly analyzes. The Yield Spread has been one of the Journals best pointers. The Yield Spread has gauged the market shifts accurately for many many decades. We usually see that some lost soul upon receiving the true sign facts, will lash themselves to the whale of their blinkered beliefs and proclaim the opposite.
That must be how America got a pathological liar installed in the White House. As history has already shown to Concord Mike, the recession he was so sure would not happen because “…it is different this time…” is here and will stretch out towards the end of 2020.
Maybe this 2020 Moby Dick moment will help open Concord Mike’s eyes. Maybe not.
I have found the Journal to be a reliable, un-biased, clear-eyed source from mature observers in the form of their tireless staff.
Lol…. lol lol lol.
Recession 2020 says hi to you little kid.
SO,so many commentators. Real estate activity has always been a great indicator of the economy, first one going into the toilet and the first one to come-out Question, could any one tell us when will it happen?? It feels that we are already in a recession (perhaps stagnation), how long will it take?? will it be like in Japan – long slow death??.
Lets remember the economic recovery was orchestated by the FED-keeping rates artificially low (yes, smoke and mirrors) and they have run out of ammunition while Congress and Executive Branches have been on vacation.
Not sure what data you published in your graph, but the 10 year dropped below the 3 month in 1989 even though your chart doesn’t show that. It would inspire a bit more confidence if you chart agreed with the St Louis Fed’s data.
Is there data that is more regional in nature, for instance, CA? Or, does it matter?
Dear Barry Weiss,
Thank you for your question. The yield spread is a national figure and there is no state-level equivalent. As such, it forecasts U.S. economic conditions. California may see some variance from national trends. We dissect these differences in this article and elsewhere on this site.
Best regards,
ft Editorial Staff
Now that the 10 year Treasury Note has replaced the 30 year Bond, we will always be just floating above the threat of financial disaster forecasts
thankyou very enlightening .
In the past you used to show past recession periods overlayed on the yield spread graph – can you please go back to that view as it’s very helpful to quickly identify the timing and length of past recessions. Thanks!
Ryan,
Thank you for your suggestion, we are now including recession lines on the yield spread chart.
Best regards,
ft Editorial Staff
It would be much more helpful and insightful if your yield spread historical chart had the median sales price data of a single family house as well as the economic indicator of a recession overlayed on the same X axis of time. This would help to see if there are any correlations that can be used for predicting the housing market.
On stock market web sites I’ve seen use of a yield spread between the 10 yr and 2 yr rates. Which is most commonly used, the yield spread you refer to (10 yr and 3 month) or this other one?
Refer to the article on the Federal Fund Rate are referring to 3-months time or the 2-years yield duration ?