Long Term Perspective
The spread between the 3-year Treasury note and the federal funds rate averaged -181 basis points in the 1980s when interest rate levels were generally much higher than they are today. The spread turned around in the 1990s to average +83 basis points.

Short Term Perspective
The spread between the 3-year note and the federal funds rate averaged +53 basis points from 2000 to 2002. Note how the spread was positive in 2000 when market expectations were focused on Fed tightening. When market sentiment shifted towards expected easing, the yield on the 3-year note was lower than the federal funds rate. The yield on the 3-year note edged up in November after declining for seven straight months, but stabilized in December and January. Rates inched up in April as stock prices rose and gave investors a newfound confidence in other investment alternatives. After a 5-year hiatus, the Treasury once again began issuing new 3-year notes on May 5th.

Economic indicators were decidedly more upbeat in October than in the past few months and this should lead to higher rates eventually. In the meantime, the Fed left the key fed funds rate target unchanged in October.