When the Fed goes low, we go high

Jun 05, 2020 | Jay Zhang


The Fed is dusting off an obscure policy tool—yield curve control—as it ramps up efforts to keep Treasury yieldslow. So, we look to go where yields remain high—that is, high-yield corporates—and explore our shift to a positive outlook on the sector.

swimming pool

Though U.S. interest rates are at zero percent, and Treasury yields are near record lows, the Fed is apparently looking for more ways to ensure that remains the case, and for longer. This week, New York Fed President John Williams grabbed headlines by confirming that the next policy tool under consideration may be yield curve control. Speaking with Bloomberg, Williams said, “Yield curve control, which has now been used in a few other countries, is I think a tool that can complement—potentially complement—forward guidance and our other policy actions. So this is something that obviously we’re thinking very hard about.”

The basic structure of a yield curve control program is that the Fed would target a specified yield target at certain points on the Treasury yield curve—pledging to buy, or sell, as many Treasuries as necessary—to peg yields to a certain level. The other countries he is referencing are Japan, which is targeting a 10-year yield of zero percent, and more recently Australia, which as of March is targeting a 3-year government bond yield of around 0.25 percent.

The Fed has actually used yield curve control in the past, specifically during World War II, in an effort to keep government financing costs for the war effort low, as the Fed capped long-term Treasury yields around 2.5 percent. But looking to where the Fed finds itself today, in some ways the strategy might actually be preferable to the Fed’s currently unlimited quantitative easing program.


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