Long Term Perspective
In the 1980s, the spread between the 7-year note yield and the federal funds rate averaged -183 basis points. The 1980s was generally a period of high interest rates and relatively high inflation - at least in the first half of the decade. The spread turned around in the 1990s and averaged +138 basis points (where 7-year note yields were higher than the funds rate).

Short Term Perspective
The spread between the 7-year note yield and the federal funds rate averaged +47 basis points in 2000-01. The spread was negative in 2000 and early 2001 before the Fed began to aggressively reduce the federal funds rate target. Yields were up only a tad in November as investors still view the Treasury market as a safe-haven. Bond investors are not expecting any Fed policy changes in the near term.