Data Visualization

Treasury Yield Movement and Its Relations to the Economy

Published

December 3, 2023

Modified

September 15, 2026

Short-Term Spreads

The three series in this section are spreads: the 3-month, 6-month, and 1-year Treasury yields minus the effective Federal Funds Rate on the same day, in % points. The Federal Funds Rate is the rate the Fed controls. A Treasury bill yield is the rate the market sets for lending to the government over the same horizon. The difference between them is a direct reading of where the market expects policy to go.

A bill yield below the Federal Funds Rate means investors accept less than the current policy rate to lock in a return for the next few months, which they do when they expect the Fed to cut. A bill yield above it means they demand more, which they do when they expect the Fed to raise. The spread turns negative before easing cycles and positive before tightening cycles. The 1-year spread moves first and furthest, since it has the most room to price in future changes.

  1. The three lines keep their order. Over 1982–2023 the 3-month spread averages −0.21 points, the 6-month −0.03, and the 1-year +0.13. The 3-month bill usually yields slightly less than the Federal Funds Rate because it is the safest and most liquid instrument in the market, while a Federal Funds loan is an unsecured overnight loan between banks. The 1-year sits above because it carries a year of expected rate changes and a small term premium.

  2. The spread turns negative ahead of each easing cycle. Sustained negative readings appear in 1988–90 before the 1990 recession, through 1997–98 during the Asian and Russian crises, in 2000–01 before the dot-com recession, from mid-2006 through 2008 before and during the financial crisis, in mid-2019 before the Fed’s first cuts since 2008, and briefly in March 2020 at the onset of the pandemic. Sustained positive readings are rarer, since the 3-month bill normally sits below the policy rate. They appear in 2018 and through 2022, when the market priced in the Fed’s hiking cycles. From 2009 to 2015 the 3-month spread stays within two tenths of a point of zero, since both the bill yield and the Federal Funds Rate were held near zero, while the 6-month and 1-year spreads drift above it as the market priced in an eventual lift-off.

  3. The largest readings are artifacts. On the last trading day of 1985 and 1986 the effective Federal Funds Rate spiked as banks bid for reserves over the year-end, pushing the 3-month spread to −6 and −10 points for a day or two. The vertical axis is clipped at −6 so that these two days do not compress the rest of the series. The range slider below the chart can be used to zoom in on any period.

Long-Maturity Yields and the Mortgage Rate

The long end of the curve is shown as yields, not spreads. The spread convention is dropped here because the Federal Reserve’s rate is a poor reference point at these maturities: a 30-year yield is priced from expectations of policy over three decades plus a term premium, so the gap between it and today’s overnight rate is not a quantity with a stable meaning. The question this chart raises, how far the policy rate reaches along the curve, is answered in the ARIMAX section. The 10-year, 20-year, and 30-year constant-maturity yields are plotted with the 30-year fixed mortgage rate, all in %. The 20-year line breaks between 1987 and 1993, the years in which the Treasury did not publish a 20-year constant-maturity yield.

The four lines are close to a single line. Pairwise correlations between the three Treasury yields and the mortgage rate are all above 0.97. The 10-year yield peaked at 15.8% in September 1981, fell for four decades to a low of 0.5% in August 2020, and rose to 4.8% by October 2023. The mortgage rate follows the 10-year yield with an average gap of 1.7 % points, which is the lender’s compensation for prepayment risk and servicing. The gap widens when rates are volatile, as in 2008 and 2022, and narrows when they are stable.

Rates and the Economy

The last chart places the Federal Funds Rate and the mortgage rate alongside four measures of the economy. CPI and real GDP are levels that rise through the whole sample, so they are shown as year-over-year % changes: inflation and growth. The dollar index is shown the same way, as its year-over-year change, using the series that begins in 2006. The unemployment rate is used as published. Every line is then in % and shares one axis.

  1. The inflation of the 1970s and its end. Inflation reached 12.2% in November 1974 and 14.6% in March 1980. The Fed’s response under Paul Volcker took the Federal Funds Rate to 19.1% in June 1981, more than nine points above inflation and the highest real policy rate in the sample. The mortgage rate followed to 18.6% that October. Inflation was below 4% by the end of 1982 and stayed low for four decades. The cost was two recessions and an unemployment rate of 10.8% in November 1982.

  2. The shape of every cycle since. The Federal Funds Rate rises during an expansion, unemployment falls, and growth runs between 2 and 4% in most quarters. The Fed cuts as growth slows, and unemployment rises after the cuts begin: 7.8% in 1992, 6.3% in 2003, and 10.0% in 2009. The 2008 recession is the one case where inflation turned negative, at −2.0% in July 2009, and the Federal Funds Rate was then held near zero for seven years. The dollar index rose 21.7% year over year in March 2009 as investors moved into dollars during the crisis, which shows that the dollar responds to risk as well as to rate differentials.

  3. The pandemic. Real GDP fell 7.5% year over year in the second quarter of 2020 and rose 12.0% a year later, the largest swings in the sample, and unemployment jumped to 14.7% in April 2020. Inflation followed, reaching 8.9% in June 2022 while the Federal Funds Rate was still 0.2%, a real policy rate of −8.3 points in March 2022 and the lowest in the sample. The Fed raised the rate above 5% within sixteen months. The dollar index rose 12.9% year over year in October 2022 as U.S. rates climbed faster than rates abroad, the rate-differential channel from the introduction.