Unexpectedly Intriguing!
November 29, 2006

Sometimes, we have absolutely no idea where one of our projects is going to lead. Our latest tool certainly fits in that category, as we started off by looking at the historic data for the yield curve in U.S. Treasuries, but kept coming back to the same question: "What bond yield spread do you need to reach a ___% probability of recession for a Federal Funds Rate of ___?"

We've kind of touched on this before, when we developed our tool for working out the spread needed to reach the 50% probability level of recession, but we had never gone beyond that, mainly because it's not something we've asked a lot before. Or even thought about asking a lot.

Then, suddenly, we kept having to go back to our recession odds reckoning tool to reverse engineer the spreads the hard way, one at a time, tweaking the input data until we got our desired result.

Well, that was nuts. And time consuming. So, instead, we took some of the data we generated and fit a curve to it so that now, all we need to answer our question is the Federal Funds Rate and the probability of recession in which we're interested in finding the associated spread in U.S. Treasuries. That work is now the tool you see below:

Federal Funds Rate and Recession Probability Data
Input Data Values
Federal Funds Rate (%)
Recession Probability Level (%)

U.S. Treasury Yield Spread Needed to Achieve Given Recession Probability Level
Calculated Results Values
Treasury Yield Spread (%)

What else can we say - our pain is your gain!

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