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 25 basis points, but averaged zero basis points in the 1990s.

Between 2000 and 2011, the yield on the 6-month Treasury bill was almost identical to the federal funds rate, on average, with this twelve year average spread at minus 4 basis points. It is worth noting that the average spread was somewhat 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 at that time of further Fed tightening.  Just earlier, the spread was negative, anticipating Fed rate cutting.

Short Term Perspective

From April 2004 through August 2006, the 6-month bill rate topped 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. From September 2006 through September 2008, the 6-month T-bill had 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, 2007 cut in the fed funds target rate and subsequent cuts.  But when the Fed began its quantitative easing in earnest in October 2008 (followed by setting the fed funds target at zero to 0.25 percent on December 16, 2008), the effective fed funds rate dropped below the 6-month T-bill.  However, expectations of a near-zero fed funds rate through mid-2015 have pulled the 6-month T-bill down to essentially match the fed funds rate.

The average yield for the 6-month T-bill in October nudged up 1 basis point to 0.15 percent.

Values shown reflect monthly averages.