This paper examines cash management bill announcements in an event study framework and finds that segmentation in the Treasury bill market is widespread and not limited to bills maturing across month-ends. Announcements of cash management bills, which represent unexpected additional supplies of outstanding Treasury bills, cause the yields on these bills to rise significantly relative to yields on adjacent maturity bills. This paper also finds, consistent with other studies, that segmentation is greater at the short end of the bill market.

This paper examines rational expectations in the Treasury bill market from 1961 to 1988 with a risk premium specified to be proportional to the volatility of excess returns using instrumental variables. From 1961 to 1972 and from 1972 to 1979, rational expectations cannot be rejected, and both the predictive power of the yield curve and the risk premium are highly significant. By contrast, with just a constant risk premium and with a risk premium proxied by moving averages of absolute interest rate changes, rational expectations are rejected for each subperiod, and the yield curve has significant predictive information only from 1972 to 1979.