Long Term Perspective

The 1980s saw a negative spread of 23 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 a mere 6 basis points over the 2000 through 2011 period.

Short Term Perspective

Since mid-2006 markets had been building in expectations of pending rate cuts by the Fed and rates on the 1-year bill edged down during the second half of 2006 even 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 2007 and into late 2008 with flight to quality a factor along with the Fed’s easing.

In mid-2008, a spike in oil prices led to a temporary jump in inflation fears and in the 1-year T-bill rate. More recently, a sluggish recovery, flight to safety over concerns about European sovereign debt, and the Fed maintaining the stance that the fed funds rate will be low for through mid-2015 have led rates to remain extremely low. The yield on the 1-year bill averaged 0.18 percent in October, matching the rate the prior month.

Values shown reflect monthly averages.