Idiosyncratic Variation of Treasury Bill Yields



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    • Federal Reserve Board, Washington, DC. I thank Rob Bliss, Lee Crabbe, Mark Fisher, Steve Lumpkin, John Rea, Glenn Rudebusch, Dave Simon, René Stulz (the editor) and three anonymous referees for helpful comments. Valuable research assistance was provided by Yongshan Duanmu. All errors are my own. The analysis and conclusions of this article are those of the author and do not indicate concurrence by other members of the research staff, by the Board of Governors, or by the Federal Reserve Banks.


I document a dramatic increase in the importance of two types of variation in Treasury bill yields beginning in the early 1980s. The first is idiosyncratic variation in individual short-maturity (less than three months) bill yields. The second is a common component in Treasury bill yields that is not shared by yields on other instruments, such as short-maturity privately-issued instruments or longer-maturity Treasury notes and bonds. Some evidence suggests the first type reflects increased market segmentation. These results have important implications for the calibration and testing of no-arbitrage term structure models and interpreting tests of the expectations hypothesis.