So the yield on the 3 mos TBill was below 1.75% for all of September. I understand why this is happening (risk aversion, flight to quality, fed priming system with money…) my question is how is this any different from a rate cut? Ok, so the discount rate has not changed so banks cannot access the discount window at a lower rate in that sense its different from a rate cut - but how else?
When people talk about a rate cut they’re usually referring to the overnight lending rate (the fed funds rate), and not the discount window rate. But the short story is that it has a similar effect in that rates are highly correlated so a dip in bonds yields drives down rates all around as does a rate cut but it’s a different mechanism. The yield on TBills is a function of all the buyers and sellers of TBills and their expectations whereas the Fed funds rate is the way in which the Fed controls the money supply.
Supply & demand on flight to quality…don’t forget when these are auctioned you are efffectively lending the money to the treasury at such low rates!
The other issue is that when the Fed cuts rates they are signalling an expansionary monetary policy. Thus, it’s not only the rate that matters is why the rate got lowered. Remember that T-bill is a lending rate and Fed Funds is a borrowing/lending rate.