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In this article, we use high-frequency daily data to examine the dynamic relationship between the federal funds futures rate and the 3-month treasury (T)-bill rate. Our results show that 1-month federal funds futures rate is co-integrated with the 3-month T-bill rate, and thus move together in the long run. We find that any deviation of the 1-month federal funds futures rate and the T-bill rate from their long-run equilibrium is corrected by the subsequent movements in both federal funds futures rate and T-bill rate. Decomposing the federal funds futures rate and the T-bill rate into a trend and cycle using the multivariate Beveridge'Nelson methodology, we find that there was a big positive cycle in the federal funds futures rate before 2008 implying a future downward movement in federal funds futures rate. We also find a negative cycle in T-bill market during the financial crisis implying that the yield on T-bill was below the long-run trend.
