Does federal funds futures rate contain information about the treasury bill rate?

N Kishor and Hardik Marfatia

Applied Financial Economics, 2013, vol. 23, issue 16, 1311-1324

Abstract: In this article, we use high-frequency daily data to examine the dynamic relationship between the federal funds futures rate and the 3-month treasury (T)-bill rate. Our results show that 1-month federal funds futures rate is co-integrated with the 3-month T-bill rate, and thus move together in the long run. We find that any deviation of the 1-month federal funds futures rate and the T-bill rate from their long-run equilibrium is corrected by the subsequent movements in both federal funds futures rate and T-bill rate. Decomposing the federal funds futures rate and the T-bill rate into a trend and cycle using the multivariate Beveridge--Nelson methodology, we find that there was a big positive cycle in the federal funds futures rate before 2008 implying a future downward movement in federal funds futures rate. We also find a negative cycle in T-bill market during the financial crisis implying that the yield on T-bill was below the long-run trend.

Date: 2013
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DOI: 10.1080/09603107.2013.808397

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