How Does the Fed Funds Rate Affect Treasury Bills?
What happens to Treasury bill yields when interest rates go up? Do they react the same way as bonds?
There are two important differences between how interest-rate moves -- by which I mean increases or decreases in the fed funds rate by the Fed -- affect Treasury bill yields, and how they affect other Treasury yields.For one, bill yields are more closely influenced by the fed funds rate. You can rely on them to move up and down with the fed funds rate (or when the Fed is expected to change the rate in the near term). By contrast, the reaction of Treasury note and bond yields to changes in the fed funds rate is sometimes more complicated. This is because bills are short-term instruments, while notes and bonds are intermediate- or long-term instruments. Second, bill yields are much more sensitive to the forces of supply and demand than note and bond yields. Bill yields can swing wildly around the fed funds rate, depending on whether the Treasury Department is issuing more or fewer bills than investors want. "The whole
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