In addition, some dealers have developed an electronic trading system that allows trading between them and investors via Bloomberg. One example is Deutsche Morgan Grenfells AutoBond System.

THE BEHAVIOR OF TREASURY BILL YIELDS OVER TIME

While U.S. Treasury bills are very important instruments in the money market, there is some evidence which suggests that bill yields no longer serve as benchmark instruments from which other money market instruments are priced. First, the correlation between the 3-month bill rate and the Federal Funds rate has diminished considerably in recent years.11To illustrate this, we examine weekly observations of the Federal Funds rate and the 3-month bill rate for the period of January 1, 1987 to December 31, 1999.12During the first nine years of this period, the correlation coefficient between the Federal Funds and 3-month bills was 0.99.

However, during the period 1996-1999, the correlation drops to 0.64. Second, a study by Gregory R. Duffee suggests that the U.S. Treasury bill market is becoming increasingly segmented and there is a measurable increase in the idiosyncratic variability of the bill yield since the mid-1980s.13 One possible explanation is that when foreign central banks intervene in currency markets to manage the exchange rate between the dollar and other currencies, they normally buy/ sell U.S.

Treasury bills.14As a result, the yield on bills may not track the yields on other money market instruments as closely as in the past.

Treasury Bill Yields versus LIBOR

LIBOR is the interest rate which major international banks offer each other on Eurodollar certificates of deposit (CD) with given maturities. The matu- rities range from overnight to five years.

So, references to "3-month LIBOR" indicate the interest rate that major international banks are offering to pay to other such banks on a CD that matures in three months. Eurodollar CDs pay simple interest at maturity on an ACT/360 basis. LIBOR serves as a pricing reference for a number of widely traded financial products and derivatives (e.g., floaters, swaps, structured notes, etc.).

11The Federal Funds rate is a banks cost of borrowing immediately available funds from another institution primarily overnight.

12Source:FederalReserveStatisticalReleaseH.15 13GregoryR.Duffee,"IdiosyncraticVariationofTreasuryBillYields,"Journalof Finance (June 1996), pp. 527-551.

14See, Timothy Q. Cook, "Treasury Bills," in Instruments of the Money Market,