The potential for big price changes makes investors willing, under certain circumstances, to accept lower yields on notes and bonds than on bills.

This anticipatory nature of intermediate- and long-term Treasuries also means that their yields don't always move in the same direction as the fed funds rate. A hike in the fed funds rate -- particularly if it's the latest is a series of hikes -- can send note and bond yields lower if investors think the hike will slow economic growth too much and eventually lead the Fed to lower the rate. Conversely, a cut in the fed funds rate, particularly if it's the latest in a series, can cause note and bond yields to rise if investors think it will overstimulate the economy, eventually leading the Fed to embark on a series of rate hikes.

But if Treasury bill yields are more predictable with respect to the fed funds rate than note and bond yields, they also are more vulnerable to shifts based on supply and demand.

There are two reasons for this. First, bill issuance is less predictable than note and bond issuance. The Treasury issues notes and bonds on a fixed schedule (two-year notes monthly, other notes and bonds quarterly), and even though there is always some mystery about the size of the auctions, surprises are few and far between. Bills also are issued on a regular, weekly schedule, but size adjustments are much more common. Also, the Treasury issues special "cash management bills" in addition to its regular issues when it can't make size adjustments large enough to meet its immediate financing needs; this occurs on a regular basis.

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