Long Term Perspective

The spread between the 6-month Treasury bill and the federal funds rate is negative when the yield on the 6-month bill is lower than the fed funds rate. In the 1980s, this spread averaged minus 15 basis points, but averaged zero basis points in the 1990s.

Between 2000 and 2006, the yield on the 6-month Treasury bill was almost identical to the federal funds rate, on average, with this seven year average spread at 1 basis point. It is worth noting that the average spread was quite different in 2004 and 2005 when the 6-month bill yield was roughly 25 to 30 basis points higher than the fed funds rate, reflecting an expectation of further Fed tightening.

Short Term Perspective

The gap between the 6-month bill and the federal funds rate remained virtually zero from July 2003 through March 2004. From April 2004 through August 2006, the 6-month bill rate surpassed the fed funds rate. When this short-term rate surpasses the fed funds rate, it suggests that investors are anticipating further rate hikes in coming months, which turned out to be the case. Since September 2006, the 6-month T-bill has fallen below the fed funds rate, indicating an expectation of lower fed funds rates ahead. The markets continually had been disappointed on that count until the September 18 rate cut and subsequent cuts on October 31 and December 11.  Views differ sharply on how much the Fed will ease further in coming months. The mid-year credit crunch changed views sharply on the need for the Fed to ease while strong economic data and inflation data released in December suggest the Fed may need to worry about inflation.

The average yield for the 6-month bill fell 58 basis points in November to 3.58 percent.

Values shown reflect monthly averages.