Yield Curve Control Waiting in the Wings? (E215)

DoubleLine Portfolio Manager Jeff Mayberry and Fixed Income Allocation Strategist Ryan Kimmel chart the powerful market reactions for the week ended May 16 surrounding Monday’s joint decision by Washington and Beijing to move from trade war to trade détente. Stocks (0:34) rallied broadly across all sectors of the S&P 500 except for a light decline in health care. As rates moved higher across the Treasury curve (4:05), traditional investment grade sectors in fixed income posted negative returns while emerging markets debt led in the winners’ circle. Commodities (6:03) declined with industrial metals and livestock diverging higher. On the macro front (7:23), markets welcomed a raft of reports including April consumer and producer prices and PCE-input import prices showing inflation moving in the right direction.

 

For their Topic of the Week (17:51), Jeff and Ryan delve into the implications for markets, in particular, for the U.S. dollar and other currencies, if the Federal Reserve were to engage in yield curve control as a means to manage the government’s ballooning debt service on the national debt. Among other aspects of this question, they examine the rare historical precedents of yield curve control by the Bank of Japan (2016-2023) and the Federal Reserve (1942-51). The latter case, however, was a mechanism to assist Washington in funding the Second World War and afterward persisted during the first years of Bretton Wood foreign exchange regime. Under Bretton Woods, the dollar was set to an exchange of $35 per ounce of gold with the currencies of America’s trading partners tied to the dollar – a vastly different world than today’s regime of free-floating fiat currencies.