Long Term Perspective
Often, one can get a sense of market expectations by looking at the spread between the 2-year note yield and the fed funds rate. When the spread narrows, or even turns negative, it means that market participants expect the Fed to ease monetary policy. When the spread widens, market participants are looking for tighter monetary policy. The spread turned positive in the third quarter and widened dramatically in the fourth quarter of 2001. The spread doubled in the first half of 2002 from the level in the fourth quarter of 2001.

Short Term Perspective
The positive spread between the 2-year note yield and the federal funds rate widened sharply in November, as the yield on the 2-year note edged up slightly and the federal funds rate target was reduced by 50 basis points. Bond investors are not expecting any policy changes in the near term.

2-year Treasury Yield & Spread to Fed Funds   •   10-year Treasury Yield & Spread 10-year less 2-year

Yield Spread: Aaa Corporate vs. 10-year Treasury   •   Yield Spread: Baa Corporate vs. 10-year Treasury

Yield Spread: Bond Buyer vs. 10-year Treasury