Campbell Harvey; New York Fed recession model
The yield-curve regime filter: a recession signal gated by a price trend
The gap between long and short treasury yields is the one macro number with a record of turning negative ahead of every modern US recession. This system does not trade that number alone — an inversion says trouble is coming, not when — so it pairs the spread with a 200-day price filter and only holds equities while both agree. What you are buying is a recession filter, and its costs are the lead times and the false alarms.
- Style
- Macro & allocation
- Approach
- Mechanical
- Difficulty
- Intermediate
- Horizon
- Long term (years)
- Holding period
- Months to years
- Time needed
- Half an hour a month
- Markets
- Index ETFs · Broad equity exposure
- Source
- Campbell Harvey's work on the term spread as a growth predictor (1986/1989); the New York Fed publishes a recession probability model built on the 10y−3m spread — Campbell Harvey; New York Fed recession model
The rule set
- Track the 10-year minus 2-year treasury spread
- Hold equities while the spread is positive and the index trades above its 200-day moving average
- Move to cash when the spread turns negative
- Never trade the spread on its own — the price filter is what turns a slow economic signal into usable timing
- Re-enter only when both conditions are satisfied again
What makes it distinctive
- The term spread has turned negative ahead of every US recession in the modern record — a claim almost no other single indicator can make
- Both inputs are published daily and need no interpretation: a treasury spread and a moving average, each simply above or below a line
- The price filter is the half that makes it tradeable — the spread alone leads the economy by anywhere from six months to two years
When it works
Late-cycle environments where an inversion precedes a genuine slowdown and equities roll over within the following year — the sequence the spread's record is built on.
When it fails
The lead time is long and wildly variable — inversions have preceded market peaks by anywhere from six months to two years, and sitting in cash for that whole stretch is expensive. The spread has also inverted with no recession behind it at all.
How a decision moves through it
Input
One index price series, two treasury yields
Daily bars for a broad equity index, plus the 10-year and 2-year constant-maturity treasury yields. The yields are macro series laid onto the price timeline by publication date — they come from the bond market, not from the instrument being traded.
Measure
The term spread, and a 200-day average
The spread is simple subtraction: the 10-year yield minus the 2-year. Alongside it, the index's own 200-day simple moving average — the fast half of the system, and the only part that watches price.
Decide
In only when both say yes
Hold equities while the spread is above zero and the close is above the 200-day average. Two conditions to be in; the macro signal alone is never sufficient.
Act
Hold the index, or step to cash on inversion
The exit is asymmetric: an inversion takes the position off by itself, without waiting for price confirmation. The spread gets a veto on the way out that it does not get on the way in.
Size & protect
A 15% stop as the backstop
The shipped version carries a wide stop for the case the two conditions do not cover — a price collapse while the curve still slopes upward. It is a disaster brake, not a trading stop; in the intended sequence it never fires.
Why a bond-market number runs an equity system
An upward-sloping yield curve is the normal state: lenders demand more to lock money away longer. When short yields rise above long ones, the bond market is collectively pricing in rate cuts ahead — and the usual reason to expect cuts is an economy about to weaken.
Campbell Harvey's research formalised what traders had long suspected: the term spread's sign predicts real economic growth, and its inversions have preceded every US recession in the modern record. The New York Fed maintains a recession-probability model built on the same idea and publishes it monthly. Little else in macro has a track record this clean — which is precisely why the signal deserves both respect and suspicion.
The suspicion comes from the denominator. The modern record contains only around eight recessions, so the spread's perfect score is a perfect score on eight events. That is genuine evidence — and it is also a sample small enough that one exception rewrites the statistics, a point the failure-modes page returns to.
A slow signal and a fast one, deliberately paired
The spread's weakness is timing: it warns quarters or years ahead, and equities often rally hard between the warning and the event. Acting on the inversion alone has historically meant leaving one of the strongest stretches of the cycle on the table. The 200-day filter exists to fix exactly this — price is the fast signal that says the weakness has actually arrived.
- To be invested, both must agree: curve positively sloped, price above its 200-day average.
- To exit, the curve acts alone: an inversion moves the position to cash without waiting for price to break.
- To re-enter, both must agree again — which keeps the system out through the choppy stretch that typically follows an inversion's resolution.
The asymmetry is the system's real design decision. It treats the macro signal as trustworthy enough to act on defensively but not offensively: worth stepping aside for, never worth buying on. Whether that asymmetry is wisdom or overcaution is the honest open question, and the recent record bears on it directly.
What this system is, and is not
This is a recession filter wearing a trading system's clothes. It will do nothing — correctly — for years at a time, then take one large defensive decision per cycle. It generates perhaps a handful of round trips per decade, cannot be evaluated over any period shorter than a full cycle, and offers no protection against bear markets that arrive without a recession attached.
Five ways into this system
- A spread and an average: the complete rule set, including the asymmetric exitTwo published numbers and three rules. The detail that rewards attention is the asymmetry: entering takes both signals, exiting takes only one.7 min read
- Binary exposure, a wide backstop, and very few taxable eventsIn or out is the only position this system knows. The real decisions are how much capital the switch governs and what the exited money holds — plus one wide stop with a single job.5 min read
- A US signal, a cycle-length clock, and a system you evaluate in decadesThe spread is a US macro signal, so the system belongs on broad US equity exposure. Its clock is the business cycle, which makes it the slowest system in the library to run — and to judge.5 min read
- False alarms, two-year leads, and a record built on eight eventsThe spread's record is real and its problems are structural: it warns too early, it sometimes warns falsely, and its perfect score rests on fewer recessions than you have fingers.8 min read
- The yield curve explained from scratch: why a bond spread scares stock investorsBefore the rules can mean anything you need one idea: what it says about the future when lending money for two years pays more than lending it for ten.7 min read
The ideas behind it
This system assumes you already know these. Each one is explained from scratch in Investing 101.
Compare with
- 200-day MA Macro TrendHold the index while it closes above its 200-day average, and sit in cash or short-term bonds while it closes below.
- Macro Top-Down (Druckenmiller-style)Work out what liquidity and the economic cycle are doing, express that view in whichever market shows it most cleanly, and be large only when the market agrees with you.
These are documented methods described for study. Nothing here is investment advice, a recommendation, or a claim about future returns — every system on this page has losing periods, and the pages say where.
Reading about a system is not having one.
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