4 Responses to “June 16, 2020”

1. Nestor says:

   June 17, 2020 at 7:20 am

   James, i’ve been hearing talk of the FED considering yield curve control to support US debt since it’s become massive and become a huge problem. IF the do something like that, Canada would follow? how would it affect the preferred share market? any thoughts? thanks.

2. jiHymas says:

   June 18, 2020 at 12:55 am

   There’s an interesting discussion of WW2 yield curve control from 2016:

   The recent global financial crisis left governments in many advanced countries with very heavy debt burdens and their central banks with huge portfolios of government bonds. With many central banks today still facing policy rates that are uncomfortably close to zero, some may follow the example of Japan, which recently added a new long-term interest-rate target to its short-term target to give itself “yield-curve control.” The Federal Reserve’s foray into similar territory around the Second World War suggests that combining yield-curve control with quantitative easing when government borrowing needs are substantial can create constraints on monetary policy that are not easily removed.

   And so far, the big-shots at the Fed seem skeptical – SF Fed President:

   San Francisco Federal Reserve President Mary Daly on Monday downplayed the usefulness of yield curve control for U.S. monetary policy, saying that while it could be a “little helper” should other tools fail to deliver, it would not be a first choice.

   “Targeting forward guidance and quantities on the balance sheet would be the policies I would want to use before we go to yield curve control” she told reporters on a conference call, saying that she is studying the costs and benefits of the approach.

   If forward guidance and bond-buying aren’t enough to keep borrowing costs low, “you can think of yield curve control as a little helper… but if we have very robust forward guidance then a lot of that movement in rates at the short end and even at the longer end, that gets done without having to go to yield curve control.”

   and Dallas Fed President:

   Dallas Fed President Robert Kaplan said Monday that he is skeptical of the central banking using so-called “yield-curve control” as a new tool to help the economy recover from the recession.

   In a talk with the Money Marketeers of New York University, a forum for economic and finance, Kaplan said he hadn’t completely made up his mind, but didn’t seem eager for any swift decision to use the tool.

   “I wouldn’t rule it out, but right now Treasury yields are relatively muted,” Kaplan said.

   Advocates of so-called yield-curve control argue that it would be a useful tool to help the central bank keep interest rates low while the economy recovers. Rising rates can choke off growth in a recovering economy because they make borrowing unaffordable.

   The Fed has signaled its intention to hold its benchmark, overnight, federal-funds rate at zero until 2023. Those rates presently stand at a range between 0% and 0.25%.

   Some economists worry that using yield-curve control would remove important market signals, leaving the Fed and investors in the dark about the economy’s health.

   As for the effect on the preferred share market … I suspect it might be pretty bad. The lower-than-free-market yields on government bonds would keep the dividends on FixedResets down, but the Fed (or the BoC) wouldn’t be throwing money into preferreds, so they would trade at higher, free-market, yields.

3. stusclues says:

   June 18, 2020 at 10:18 am

   “The lower-than-free-market yields on government bonds would keep the dividends on FixedResets down, but the Fed (or the BoC) wouldn’t be throwing money into preferreds, so they would trade at higher, free-market, yields.”

   I think this is likely, at the margin. However, a widening seniority spread ought to be mitigated by free-market buyers like large family offices and others in the willingness-and-ability-to-hold crowd. These folks are not all obsessed with the liquidation value of their portfolios like the manage-money-for-others and the financial press.

4. mbarbon says:

   June 29, 2020 at 6:35 pm

   I’ve seen some recent articles where there is a 10% chance of US rates being negative by the end of the year (I seem to recall that it was “math” on the futures market).