Long Term Perspective
The 1980s saw a large negative spread of 125 basis points between the federal funds rate and the yield on the 1-year Treasury bill. This shifted sharply in the 1990s when the average spread was a positive 19 basis points.

Short Term Perspective
The average spread between the year bill and the federal funds rate stood at -7 basis points between 2000 and 2002. A gap developed in 2000 and the first part of 2001. This reflects market expectations of Fed tightening in early 2000, but a shift towards easing when economic conditions began to soften in 2000. An aggressive easing policy by the Fed in 2001 led to a closer alignment between the federal funds rate and the one-year bill yield from July to November 2001. In December 2001, the spread turned positive again reflecting the market belief that the Fed easing cycle was complete. Since August 2002, yield spreads narrowed as bond investors concluded that a rate hike was not imminent. Also, political factors coupled with a weak stock market pushed investors into safe haven securities.

The yield on the year bill was virtually unchanged in October relative to September despite the fact that economic activity has turned more favorable lately.