2-year Treasury exceeds federal funds rate

On May 22, the 2-year U.S. Treasury yield closed at 4.13%, moving above the effective federal funds rate, according to Advisor Perspectives’ daily yield snapshot and Federal Reserve Bank of New York data. The move drew attention because the 2-year note is widely used as a market gauge of where investors think Federal Reserve policy is headed over the next several quarters. The 10-year Treasury yield finished the same day at 4.56%, leaving the curve still upward sloping between those two maturities. Yahoo Finance and other market commentary outlets highlighted the crossover on May 22. ### Which rate actually moved above the Fed’s rate? The 4.13% figure refers to the 2-year Treasury yield, not the Fed’s target range. The federal funds rate that trades in markets is the effective federal funds rate, or EFFR, which the New York Fed published at 3.62% for May 21, the latest available reading as of May 22. The Federal Reserve’s policy setting is still described separately as a target range, while the EFFR is the overnight rate observed in transactions. (advisorperspectives.com) That distinction matters because headlines comparing the 2-year yield with “the fed funds rate” are usually comparing the Treasury yield with the effective rate, not with a futures contract or a longer-term policy forecast. (newyorkfed.org) ### Why do traders watch the 2-year note so closely? The 2-year Treasury is one of the bond market’s clearest readouts on expected monetary policy because its maturity sits close to the horizon over which investors expect the Fed to change rates. When that yield rises above the current effective fed funds rate, it suggests investors are demanding more compensation to hold short-dated government debt than they receive in overnight lending. (newyorkfed.org) Yahoo Finance said on May 22 that the move above fed funds had become a focal point in market commentary. The outlet tied the rise in yields to renewed inflation worries and discussion that the next Fed move might not be a cut. ### Does this mean the Fed has already changed policy? (advisorperspectives.com) May 22 market pricing did not mean the Federal Reserve had changed its benchmark rate that day. The New York Fed’s EFFR publication still showed 3.62% for May 21, and the Board of Governors’ H.15 release continued to list the effective rate as a daily reference series rather than a new policy action. (msn.com) A 4.13% 2-year yield instead shows where investors were willing to buy and sell that security at the end of the session. Treasury’s daily rate table for May 22 also showed the 2-year at 4.13%, confirming the end-of-day level cited in market write-ups. ### How unusual is the gap right now? The May 22 spread was about 0.51 percentage point using the 2-year yield at 4.13% and the latest published EFFR at 3.62%. (newyorkfed.org) That left the 2-year above the overnight policy-linked rate by roughly 51 basis points. The same day’s curve also showed the 10-year at 4.56%, or about 43 basis points above the 2-year. (treasury.gov) That meant the market was not only pricing short-term rates above the current effective fed funds rate, but also keeping longer-dated yields elevated. ### What is the next data point to watch? (advisorperspectives.com) May 26 is the next scheduled publication date for updated EFFR data on FRED after the Memorial Day weekend, based on the New York Fed series update calendar. Treasury’s next daily yield table will show whether the 2-year remains above the effective federal funds rate when U.S. markets reopen. (fred.stlouisfed.org) (advisorperspectives.com)