Why is the 2 year Treasury yield so closely tied to the Fed Funds Rate?

124 views

If you look at the 2 year Treasury yield and compare it to the effective Fed Funds rate historically they are almost identical. Why?

The market decides the yield and the Fed decides the rate. Just trying to understand why they are so close and why the 2 year yield has been such an accurate predictor of Fed Funds changes. Also why people say things like “The bond market is telling the Fed they have raised rates to high”.

Thanks!

In: 3

Anonymous 0 Comments

The 2 year Treasury yield is the amount of interest paid on a 2 year government bond, and the Fed Funds rate is the interest rate at which banks can borrow money from the Federal Reserve. Because the market and the Fed both play a role in determining these rates, they tend to be similar. The bond market, which includes the 2 year Treasury yield, can also give clues about what the Fed might do with interest rates in the future. For example, if the 2 year yield is going up, it could mean that the bond market thinks the Fed will raise interest rates. So, people might say “The bond market is telling the Fed they have raised rates too high” because the 2 year yield is going up.