Why Treasury Bill and Savings Rates Are Not Interchangeable

Summary

The document asks whether historical short-term Treasury bill yields can stand in for savings account interest rates on the grounds that both are often treated as risk-free returns. The answer says they should not be assumed equivalent. It points to differences in rate dynamics: savings rates and Treasury yields reflect distinct products, demand conditions, and funding needs, which can shift over time.

It also identifies bank margins, reserve practices, operating risks, and regulatory requirements as factors shaping deposit rates. More broadly, the response cautions that a risk-free rate is a theoretical benchmark rather than a directly observable rate that every instrument exactly matches. The explanation offers qualitative reasons but no data, comparison period, or quantitative estimate of the differences. For empirical work, the choice of proxy should therefore reflect the instrument, horizon, and market being modeled.

Key ideas

• Treasury bill yields and savings account rates arise from different market mechanisms.
• Funding demand and liquidity conditions can affect short-term government rates.
• Bank margins, reserve practices, costs, and regulation influence savings rates.
• The risk-free rate is a theoretical benchmark, so observed rates are imperfect proxies.

Tags

# "Equivalent" data sets despite different numbers


# "Equivalent" data sets despite different numbers












Are the historical data sets of short term treasury bill rates considered the same as the historical data sets of savings account interest rates because by definition they are both risk free rates of returns?

## Answer by Lucas Morin (score 3)

https://quant.stackexchange.com/a/11050

From a note of P. Krugman (link):

So no it is not. Why ? I would say 3 cause:

First: Dynamics, saving rates are longterm figures. Offer and demand would be different for these products. Some time there is a lack of liquidity and a need of financement, so a huge demand in short term bonds.

Second: bank margin, reserve policies, they have to earn some money, they have to support some risk, follow rules and laws...

Third: risk free rates of returns is a theoretical construction, there is no such thing in real life. Some rates would approach it but wont be the same.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.