Spread probabilities 10-3 months and 10-2 years:
Figure 1: The probability of a recession in the specified month using a spread of 10-3 months. (blue), a 10-2 year spread (brown) and a 10-3 month spread supplemented by the Fed rate, Chicago Financial Conditions Index, 12 month oil price change (turquoise) . The NBER identified peak-to-trough recession dates shaded in grey. Source: Treasury via FRED, NBER, author’s calculations.
The probabilities for June 2023 are 3.8% and 21.2% for spreads of 10 years-3 months and 10 years-2 years. If you add to the 10-year and 3-month Chicago financial conditions index, the federal funds rate and the 12-month change in the oil price, then the probability is 8.4%. Note that this specification is the same as the one used Ahmed (2022)excluding foreign spreads and equity market variables (McFadden R2 is 0.51, compared to 0.28 for non-expanded).
I’m sure alternative term spread models, including other variables, could lead to higher implied recession probabilities, but simple vanilla models currently don’t lead to more than 22% (10–2 years) over a 12 month horizon (26 ). % on the horizon of 18 months for 2023M12).