Time Frame: Intermediate
Category: Monetary

Description

T-Bills are often viewed as an investment offering a "risk-free rate of return." Investors weigh the expected return of stocks versus the yield on these fixed income instruments. As T-Bill yields fall, investors have incentive to buy stocks seeking higher rates of return. Lower "risk free rates of return" combined with high expected returns on stocks often drive stock prices higher even during periods of weak corporate earnings and/or sluggish economic growth.

The Federal Funds Rate is the rate at which institutions make short-term loans to one another to cover temporary liquidity obligations. This market is also one of the Federal Reserve's avenues for adding or subtracting liquidity in the monetary system. Changes in the Fed Funds market can be influential in the future direction of interest rates.

Calculation & Significant Levels

T-Bill and the Fed Funds rate of change: The calculation is the same. The net change in yield over the last three months is divided by the yield three months prior. If the change is positive (rates have moved up) then the rate of change will be a positive number. When the rate of change is over 10% it is considered bearish. When it is less than -5% it is considered bullish.

Formula: (current yield - yield three months prior)
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               (yield three months prior)

Gauge Elements: Magnitude
Updated: Weekly (as of Friday close)

Strategy