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Why Treasury Bill Yields Can Fall Below the Fed Funds Rate

Article Quant Q&A · Author: MaPy
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Summary

The document explains why very short-term U.S. Treasury yields can trade below the federal funds rate. One answer points to an imbalance between cash demand and Treasury bill supply: money market funds had abundant cash, the Federal Reserve’s reverse repo facility was absorbing large sums, and weekly four-week bill issuance had declined. Strong demand relative to limited supply can raise bill prices and lower their yields compared with fed funds.

A second answer offers a market-risk explanation. When investors seek safe assets amid recession fears or uncertainty around a holiday, Treasury prices can rise and yields fall, while interbank funding conditions may push the fed funds rate higher. These are explanations for the conditions described in the discussion, not a universal rule. The relative rates depend on supply, demand, funding conditions, and risk appetite; the safe-haven explanation is presented as a plausible interpretation rather than demonstrated evidence.

Key ideas

  • Excess cash seeking short-term investments can increase demand for Treasury bills.
  • Reduced bill issuance alongside stronger demand can make bills trade at lower yields than fed funds.
  • Safe-haven buying can lift Treasury prices and reduce yields during periods of market concern.
  • Interbank funding rates and Treasury yields respond to different market forces.

Tags

Fixed incomeUS marketsMarket microstructure
Full text
# Why Fed Funds Rate's is higher than U.S. treasury yield on the short term (< 2M)


# Why Fed Funds Rate's is higher than U.S. treasury yield on the short term (< 2M)












The current Fed Funds Rate is 1.75% whereas the 1 Month Treasury Rate is at 1.28%. I would have expected the Fed Funds Rate to be lower than Treasury rate on short maturities, what is the reason of the spread?

## Answer by AlRacoon (score 10, accepted)

https://quant.stackexchange.com/a/71493

There currently is an excess supply of cash looking for short term investments. Money market funds have been receiving a lot of subscriptions. The Feds reverse repo facility has been reaching new records over the last couple of months and has been consistently above $2 Trillion lately. In reverse repo, investors are lending money to the Fed. All the while, there have been no participants in the Fed repo facility.

Also, UST issuance in 4 week bills have been dropping. While several months ago, the US Treasury was auctioning 50B USD a week, the auctions have now been on average 35B USD a week. The reduced supply, with increased demand has caused 4 week bills to trade rich (lower yields) relative to Fed Funds.

## Answer by Jan Stuller (score 2)

https://quant.stackexchange.com/a/71492

My guess would be this: US treasuries are a "safe-haven" asset where market participants pour money when they fear the stock market will take a dive / other adverse scenarios.

Over the past 4 trading sessions, the US Treasuries have rallied quite significantly (so their yields have lowered): I think that's because today (4th July) is a public holiday in the US so the stock market is closed: the markets are generally risk-averse over holidays, particularly when they fall on a "long weekend" (so people wanted to park their money somewhere safe).

Additionally, there have been fears over the past week that a recession was on the horizon: another reason why the market has become more risk-averse and safe haven assets such as US treasuries have seen increased demand.

On the other hand, the FED funds rate is the rate at which banks borrow from each other: when the market becomes more risk-averse, the rate might actually spike up.

So in conclusion, it is plausible that during market distress, the FED funds rate would be higher than the US treasury yield: although I agree that in "normal" circumstances, the FED funds rate (being an overnight rate) carries "less" of a credit risk than the 1-month borrowing rate of the US government and so should be normally lower.

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.