Tasa interbancaria y tasa de los bonos

How does the Fed Funds Rate affect Treasury yields?

"Treasury bills are more predictably influenced by the fed funds rate than notes and bonds because Treasury bills and the fed funds rate are competing investments in the money market. The money market is the market for high-quality, short-term debt instruments. Just as individuals put uninvested cash into money market mutual funds, where they can earn interest without putting principal at risk, institutional investors for the same purpose invest directly in the money markets by buying instruments like fed funds and Treasury bills.

As investments, fed funds and Treasury bills generally offer comparable yields. Note and bond yields are less closely tied to the fed funds rate because their longer maturities (from two to 30 years) mean more can happen during their lifetime. That gives them the potential to undergo big price changes. In general, the longer the maturity of a debt security, the greater the potential price changes."

Interest rates for beginners

"When the Federal Reserve changes the Federal funds rate, its effects ripple out through the economy, but with all sorts of lags and dampening effects. Broadly speaking, interest rates can differ from the Fed funds rate for two reasons: maturity (the amount of time you are lending money for) and credit risk (the risk that you won’t get paid back). We’ll talk first about U.S. Treasuries, because “by definition” they involve no credit risk.

The Treasury Department raises money by issuing bonds that range in maturity from a few days to 30 years. At the low end, there is virtually no risk of any sort, so the yield is purely a function of supply and demand; if a lot of people have money and nothing else to do with it, yields will be low. There was an auction today for 4-week Treasury bills, and the yield was exactly zero; people are lending money to the government for free.

With a longer maturity, however, there is risk, even when lending to the U.S. government. The main risk is inflation. Because all the payment stream of a bond is fixed in nominal terms, the higher inflation is over the maturity of the bond, the less it will be worth to you in real terms. What matters here is not the current rate of inflation, but investors’ expectations of what inflation will be over the maturity of the bond. If investors expect inflation to go up, they will demand higher yields to compensate; even if they expect inflation to remain steady, they will still demand a higher yield for a longer-maturity bond, because the longer maturity means there is more time in which inflation could increase. Paul Krugman. Y aca