Long Term Perspective

The yield on the 3-month Treasury bill is typically lower than the federal funds rate. In the 1980s, the 3- month bill averaged 64 basis points less than the funds rate, but in the 1990s this average fell to 18 basis points. The spread between the 3-month Treasury bill and the federal funds rate averaged minus 17 basis points between 2000 and 2011. This means that the 3-month bill yield was typically 17 basis points lower than the federal funds rate.

Short Term Perspective

The gap between the 3-month bill and the fed funds target has shrunk back to more normal and negligible amounts now that the Fed has the fed funds rate essentially at zero and still plans to keep it there for some time. Earlier, the negative gap widened during 2007 and accelerated in early 2008 as expectations rose for the Fed to cut rates and also on heavy flight to quality. Treasury rates fell over credit crunch concerns. Now, both the effective fed funds rate and the 3-month T-bill both are just barely above zero due to the Fed’s rate cut going back to December 16, 2008.  Also, the Fed in recent FOMC statements and minutes indicated that the effective fed funds rate likely would remain low for an extended period through at least mid-2015.  And Treasuries are the markets’ favorites for flight to safety when concerns re-emerge over European sovereign debt.  In October, the average yield on 3-month bills slipped 1 basis point to 0.10 percent while the effective fed funds rate gained 1 basis point to 0.16 percent (monthly average).

Values shown reflect monthly averages.