Uncovering nonlinear dependencies in the Treasury-funds rate spread: Quantile-based explanation

Abstract

This study examines the structural dynamics of the spread between the 10-year Treasury yield and the federal funds rate, a key indicator of U.S. financial conditions. Cross-quantilogram analysis reveals a nonlinear dependency across adjacent periods, with stronger connectedness observed in the tail distribution than in the middle. Additionally, the functional quantile autoregression model confirms the spread’s nonlinear and asymmetric nature from a distributional perspective. Specifically, higher quantiles of the previous spread exert a stronger influence on the current spread, indicating a positive persistence mechanism. Conversely, lower quantiles of the previous spread negatively affect the higher quantiles of the current spread. These findings suggest that bullish market conditions tend to sustain themselves, whereas bearish conditions hinder upward momentum, underscoring the need for quantile-specific policy interventions.