1Y Treasury Yield vs Fed Funds Rate

The 1-Year Treasury Constant Maturity Yield (DGS1) is the daily yield on 1-year US Treasury bills as published in the Federal Reserve H.15 release. It is calculated from the daily yield curve smoothing of actively traded Treasury bills with maturities clustered around the 1-year mark. The yield embeds the average expected fed funds rate over the next 12 months plus a small term premium that ranges from approximately negative 5 to plus 25 basis points across modern history.

The Federal Funds Rate (FEDFUNDS on FRED) is the effective rate at which depository institutions trade overnight federal funds, published monthly by the New York Fed and constrained within the FOMC target range. As of April 30, 2026 the upper bound is 3.75% and the lower bound is 3.50%, with the effective rate trading near the middle of the corridor at approximately 3.62%. The 1Y minus fed funds calculation depends on which boundary you use, but the most informative version is 1Y minus the upper bound, currently 3.48% minus 3.75% equals negative 27 basis points. That spread has averaged approximately negative 35 basis points across the post-2010 cycles.

The negative 27 basis point spread in April 2026 prices approximately one full 25 basis point cut over the next 12 months, almost exactly matching the March 2026 SEP median dot of 3.10% by year-end 2026. The April 29, 2026 FOMC meeting held rates on an 8-4 vote, the most dissents since October 1992, with Governor Miran voting for an immediate cut and three other voters dissenting against the cut-bias language. The dissent breadth signals that the FOMC's cut path is not a unanimous baseline; the 1Y yield has held firm because markets are pricing the median path, not the dissent.

The configuration is the same as June 2019, when the 1Y yield at 1.95% sat 30 basis points below fed funds at 2.25%, also pricing one cut. The 2019 episode delivered three cuts (July, September, October 2019), so the realized policy path was more dovish than the priced path. The 2026 setup is therefore consistent with markets having underestimated the Fed's eventual easing in similar configurations historically. If the May 2026 nonfarm payrolls release shows a meaningful cooling or if the Iran war risk reasserts, the 1Y could repricing 30 to 50 basis points lower within weeks, the pattern that recurs whenever the 1Y minus fed funds spread sits this close to zero.

The 1Y minus fed funds spread has inverted (gone negative) seven times in the post-1976 era. First, 1979 to 1980: spread reached negative 350 basis points during the Volcker initial hike, recession followed within 6 months. Second, 1989 to 1990: spread reached negative 175 basis points, recession followed in 8 months. Third, 2000 to 2001: spread reached negative 200 basis points, recession followed in 4 months. Fourth, 2006 to 2007: spread reached negative 100 basis points, recession followed in 12 months. Fifth, 2019: spread reached negative 80 basis points, no recession before COVID overrode the signal. Sixth, 2022 to 2023: spread reached a record negative 525 basis points in November 2022, no recession through April 2026.

The 2022 to 2026 episode is the most consequential anomaly in the post-1976 record. The November 2022 spread of negative 525 basis points should have signaled a recession by November 2023 at the latest under the historical mean lag of 12 months. Instead, the US economy continued to expand at approximately 2% real GDP growth through 2024 and 2025. The Cleveland Fed Anxious Index, which combines the 1Y-fed funds spread with other curve signals, flagged the divergence in its September 2024 quarterly review. The current April 2026 spread of negative 27 basis points is in normal-flat territory, neither pricing imminent recession nor an extended hold.

The 1Y yield is dominated by 4-week, 13-week, 26-week, and 52-week Treasury bill auction calendars. Treasury issues 52-week bills monthly, typically around the third Tuesday, and the auction outcome moves the 1Y constant maturity yield by 1 to 4 basis points depending on whether the auction tails or stops on the screws. The April 2026 calendar showed three 52-week bill auctions during Q1, with concentrated auction supply in March producing a 6 basis point widening of the 1Y minus fed funds spread that reversed within two weeks.

The more durable distortion comes from net Treasury bill issuance shifts driven by the Treasury's quarterly refunding announcements. The November 2025 refunding shifted the bill share of total Treasury issuance from 22% to 26%, increasing 1Y bill supply by approximately $40 billion per month through Q1 2026. The supply increase pressed 1Y yields modestly higher relative to the fed funds path, contributing to the apparent hawkishness of the early 2026 spread reading. Reading the 1Y minus fed funds spread without the issuance overlay misses approximately 10 to 15 basis points of technical drift in either direction.

Foreign central banks hold approximately $7.5 trillion of US Treasury securities, with reserve managers from the People's Bank of China, the Bank of Japan, and the Swiss National Bank concentrating front-end purchases at the 1Y to 3Y bucket. When foreign demand surges (typically during EM stress or when foreign reserve managers rebalance away from longer-duration assets), the 1Y yield gets pulled lower without a corresponding change in fed funds expectations. The September 2022 episode is the clearest recent example: the BoJ's defense of the yen forced JPY-USD intervention that funneled $50 billion into US bills over six weeks, producing a 1Y yield decline of approximately 25 basis points unrelated to the Fed's hiking path.

The inverse pattern operated during the spring 2024 China reserve outflow. The PBoC drew down its US Treasury holdings by approximately $80 billion across Q1 to Q2 2024 to defend the yuan against dollar strength, releasing 1Y bills that pushed yields higher relative to fed funds. The April 2026 1Y yield at 3.48% incorporates approximately neutral foreign central bank flow, with no major reserve rebalancing currently underway. Macro desks watch the weekly Fed custody data (the H.4.1 release showing foreign-held Treasuries at the New York Fed) as the cleanest indicator of whether the 1Y yield is being pushed by Fed expectations or by foreign flow.

The 1Y minus fed funds spread has two natural cross-checks: SOFR futures and the 2Y Treasury yield. SOFR futures price the average overnight SOFR rate during each calendar month or quarter, allowing precise extraction of the implied path of the Fed's policy rate. The April 2026 SOFR futures imply 3.42% by December 2026 (one cut) and 3.18% by December 2027 (two more cuts), almost exactly matching the SEP median dot path. When SOFR futures and the 1Y yield agree on the implied path, the curve is well-anchored; when they disagree, the 1Y is being distorted by issuance, foreign flow, or term premium.

The 2Y Treasury yield (DGS2) sits at 3.78% in late April 2026, 30 basis points above the 1Y. The positive 1Y-2Y curve reflects markets pricing cuts followed by a hold, the standard configuration after a Fed peak. When the 1Y-2Y curve inverts (1Y above 2Y), markets are pricing cuts in the near term followed by deeper cuts later, the pattern that has historically preceded recessions within 6 to 12 months. The current curve shape is consistent with a benign hold-and-cut expectation rather than an imminent recession scenario. The 1Y minus fed funds, the 1Y minus 2Y, and the SOFR-implied path read together are the cleanest read on the Fed expectation curve.