Taps Coogan – March 9th, 2021

Enjoy The Sounding Line? Click here to subscribe.

When the Fed did yield curve control from 1942 to 1952, despite pegging both short and long term interest rates, most the buying that the Fed did to enforce the peg was at the short end of the treasury curve. In fact, the Fed ended up being a net seller of longer dated treasury bonds for at least the first five years of the program.

Why?

Imagine that the Fed pegged the treasury cure where it stands today. Why would an investor buy a 1-year treasury bill yielding 0.084% when they could buy a 10-year yielding 1.5% and sell it after one year for a capital gain, i.e. roll down the yield curve? They wouldn’t. The Fed eliminates all of the risk associated with ‘rolling down the curve’ by pegging rates along the entire curve.

Whereas the Fed likes to signal their simulative monetary policies long in advance to get the most ‘juice’ out of them, doing so with yield curve control could be very disruptive.

If the Fed started to ‘think out loud’ about implementing yield curve control, investors would presumably try to front run the Fed by dumping shorter duration treasuries. The yield curve would flatten out and short term funding markets would seize up. Toying with doing yield curve control would force the Fed into yield curve control.

If the Fed is going to do yield curve control, don’t expect the them to talk about it much before hand.

Would you like to be notified when we publish a new article on The Sounding Line? Click here to subscribe for free. Also, please consider sharing this article so that we can grow The Sounding Line!