Long Term Perspective

The spread between the 10-year Treasury note yield and the federal funds rate averaged minus 182 basis points in the 1980s. Interest rates were generally high during the period, and so was inflation. In the 1990s, the spread turned around so that the 10-year note yield surpassed the funds rate by 150 basis points on average.

Between 2000 and 2006, the spread between the 10-year note and the federal funds rate averaged 151 basis points. The spread averaged 108 basis points in 2005, but this average fell significantly in 2006 to minus 17 basis points.

Short Term Perspective

While yields on long-term securities generally move in tandem with changes in short term securities, long-term yields may not move by the same magnitude. In 2004, 2005, and 2006 yields on long-term securities, such as the 10-year note, did not move in tandem with rate hikes orchestrated by the Federal Reserve. Indeed, 10-year note yields were higher before the first rate hike in June 2004 than in the months after when the Fed raised the funds rate target at each FOMC meeting in 2004 and 2005 and through the last recent hike in June 2006.  Early in 2007, long-term rates had come down both due to slower growth in demand for loanable funds and also due to expectations of lower inflation.

The fed funds rate target was boosted 17 times and 425 basis points over the June 2004 through June 2006 period, but the 10-year average yield did not increased by a similar magnitude. This is primarily because long rates are relatively stable as long as inflation expectations are stable. Rates did firm a little early in 2007 due to inflation concerns but softer inflation and economic data eased those concerns by mid-2007 and yields softened. Flight to quality also helped pushed rates down.

The average 10-year note yield slipped 38 basis points in November to 4.15 percent.

Values shown reflect monthly averages.