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, but then narrowed in the second half of the year as a weak economy kept bond investors on the lookout for Fed easing.

Short Term Perspective
The average yield on the 2-year note edged up 4 basis points in October and the spread between the 2-year note and the fed funds rate increased similarly. The spread tends to widen when bond investors no longer expect the Fed to ease monetary policy.

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