The T-Bill Rate Catches Up to the Fed’s Rate

Although the stock market may be headed back to where it was in March, there’s a major difference between now and three months ago–the short-term credit market isn’t nearly as chaotic as it was. This doesn’t suggest that the stock market shouldn’t be falling, but it could mean that the worst of the credit crunch has passed.
The yield on the three-month T-bill is usually pretty close to the Fed Funds target rate, but that relationship went kabluey last year. Yesterday, for the first time in over two years, the T-bill rate nearly exceeded the Fed Funds target rate.
Last August, the T-bill rate plunged all the way to 2.95% (and an intra-day low of 2.4%) while the Fed was still at 5.25%. That’s a huge gap.
Here’s a look at the difference between the Fed Funds target rate and the yield on the three-month Treasury:

The Fed responded by cutting and cutting, but the T-bill rate continued to head lower. By mid-March, the spread was still close to 200 basis points. On March 20, the intra-day low for the three-month T-bill was just 0.2%. That’s a panic price.
Since the Fed last cut in late April, the T-bill rate has slowly crept higher. Now of course, there’s talk of the Fed raising rates soon.

Posted by Eddy Elfenbein on June 11th, 2008 at 12:14 pm

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.