Long Term Perspective

The spread between the 5-year Treasury note and the federal funds rate averaged 44 basis points in the 1980s. This was a period of high interest rates and (relatively) high inflation. The spread in the 1990s averaged a much higher 116 basis points.

 

The spread between the 5-year note yield and the federal funds rate averaged 106 basis points between 2000 and 2014. The average spread stood at minus 22 basis points in 2006, but fell to minus 60 basis points in 2007 as more investors moved funds into the bond market on flight to quality over subprime issues and also due to expectations of further Fed easing in 2008.  The spread bounded back into positive territory in 2008, averaging 87 basis points, reflecting the Fed's sharp rate cuts.  In 2009, the  spread jumped sharply to 203 basis points due to the Fed cutting the fed funds target to near zero in December 2008.  But it eased back to 175 basis points in 2010 on flight to safety in Treasuries and declined further to 142 basis points in 2011, to 133 basis points in 2012, to 106 basis points in 2013, and to 155 basis points in 2014. 

 

Rates fell notably in mid- and late 2010 on flight to safety on concerns about European sovereign debt and on the Fed implementing a second round of quantitative easing.  Inflation fears from higher oil prices, a lessening of concern about European sovereign debt, and better economic data bumped rates up in early 2011.  But weaker growth in late 2011 and QE3 weighed on rates in late 2012 with QE4 in early 2013 also tugging down on Treasury yields.  Taper talk bumped rates up in mid-2013.  Actual taper in late 2013 and through October 2014 led note rates up further.

 

 

Short Term Perspective

In 2012, concern about oil prices and European sovereign debt were "on" and "off," depending on traders' views of progress or not on sovereign debt in Europe.   But a softening in global growth—including the U.S.—led to slippage in rates in 2012.  However, there was modest firming in January 2013 on better economic news in the U.S.  But by March and through May, economic indicators suggested a slowing in economic growth, leading the 5-year note rate to ease.  But in June, fears of early tapering by the Fed caused the 5-year yield in to jump 36 basis points to 1.20 percent, putting the spread at 110 basis points, compared to 73 in the prior month.  Taper talk kept upward pressure on rates until the Fed surprised markets by not tapering at the September 17-18, 2013 FOMC meeting.  Measured taper in 2014 led Treasury rates to firm. In March, flight to safety weighed on the note—largely geopolitical concerns.   Plus, the Fed indicated indirectly in March FOMC minutes that it is still patient about the first increase in policy rates.  In March, the 5-year rate was up 5 basis points to 1.52 percent.

 

 

Values shown reflect monthly averages.