Long Term Perspective

The 1980s saw a large negative spread of 125 basis points between the federal funds rate and the yield on the 1-year Treasury bill. This shifted sharply in the 1990s when the average spread was a positive 19 basis points.

The average spread between the year bill and the federal funds rate stood at 11 basis points between 2000 and 2006.

Short Term Perspective

In early 2003, market players were still worried about the economy and inflation pressures were under control. However, as the year progressed, bond investors began to believe that the Fed would soon raise the fed funds rate target from its low rate of 1 percent. In fact, the Fed didn’t begin to raise rates until June 2004, and by that time, the yield on the 1-year bill was significantly higher than the fed funds rate target. Market players anticipated Fed rate hikes in 2004, 2005 and the first half of 2006. Rates on the 1-year bill edged down during the second half of 2006 while the fed funds rate has held steady. Rates were generally steady in 2007 until the credit crunch rattled equity and credit markets. Rates fell sharply from August through November with flight to quality a factor along with the Fed’s easing. 

The yield on the 1-year bill averaged 3.50 percent in November, declining 60 basis points for the month. The average yield for the month was below the fed funds rate target of 4.50 percent, set by the Fed on October 31 and before the additional 25 basis cut on December 11.

Values shown reflect monthly averages.