I've come across this chart from a few months ago and am unable to trace down its origins. But I would like to think I should be able to decipher it even without the authors whispering in my ear. So even without the original text, I want to see what important conclusions can be drawn from the chart:

enter image description here

I have a cursory understanding of the x and y axes. All the data is available from St. Louis Fed (only tricky thing is that the temporal component is not shown, aside from "you are here" denoting time of writing). Also, IOER seems to have been replaced with IORB since. Methodology aside, I struggle to grasp what t-bill/IOER spreads are supposed to reflect. I'm guessing it is some kind of anomaly if risk free rate is not proportional to money supply growth, but I don't understand the intuition.


Clearly, the authors of the chart were keen to flag falling spreads in a highly liquid environment, but is there an easy explanation for what implications are hinging on such a relationship?

  • $\begingroup$ twitter.com/hussmanjp/status/1471902712283475976. Google is your find - search for: 3-month treasury bill yield over-and-above interest on excess reserves and click on images. Since the axes is cut off, I am inclined to believe that whoever took the screenshot intentionally wanted to exclude the source. $\endgroup$
    – AKdemy
    Aug 5 at 0:07
  • $\begingroup$ @Akdemy Still bit cryptic, but sounds like if Fed keeps monetary base very high in ZLB then all the Fed's counterparties will be stuck with poorly yielding bonds, thus mechanically increasing interest rate risk for everyone? $\endgroup$ Aug 5 at 1:08
  • $\begingroup$ And he says forcing 'investors' to hold the near zero bonds, but guess most would be from treasury not the buyside? Still, would not be good for treasury I guess $\endgroup$ Aug 5 at 1:48

1 Answer 1


Hussman has loads of online articles spanning several years about this topic. You can read them to see what the author intends to show with this - you can find them quickly using Google - search for: 3-month treasury bill yield over-and-above interest on excess reserves and click on images - or add Hussman directly, which makes the search more explicit

It's his version of the "liquidity preference curve".

If the Fed creates more zero-interest money than people want to hold, individual holders try to chase other securities that offer a pickup in yield. Of course, all of the base money still has to be held by someone, so it doesn't go "into" those other securities. Rather, increasing the quantity of zero-interest hot potatoes causes investors to drive up the prices of closely competing securities, to the point where the "marginal" holder of money is indifferent between holding zero-interest money and low-interest Treasury debt. Here's what his looks like. It's my version of what economists call the "liquidity preference curve."

enter image description here

Based on this chart, he also explains that (refering to the large area on the right hand side where the value of 3-month treasury bill yield over-and-above interest on excess reserves is ~0)

The Federal Reserve could presently roll more than one-third of its current asset holdings off of its balance sheet without producing any departure of the Federal Funds rate or Treasury bill yields from zero.

The reason he chose to plot 3-month treasury bill yield over-and-above interest on excess reserves is explained in this artcile. Plotting only the 3 month treasury bill results in some scatter points (as a result of paying interest on reserves in those years) to deviate from the historical "liquidity preference" curve.

enter image description here

To normalize this, he decided to change the left-hand axis of the graph, so that it shows the level of market interest rates minus the level of interest on excess reserves (IOER), which is what you look at.


Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.