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YCC: Coming Soon To The Fed?
If you had any doubts as to what Donald Trump wants in a Fed Chair, I don't know why. Why you had an
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Curious how many of the fund managers who believe YCC is coming are buying long bonds now. My would be my guess not many.
I wonder about this as well. I suppose if you assume that Trump is going to focus on juicing the stock market first, bonds will be an afterthought. There is also the risk that Trump doesn’t get what he wants vis a vis rate cuts, but it’s looking more likely every day that he will get rate cuts and YCC once he realizes rate cuts won’t be sufficient to achieve whatever hare-brained outcomes he thinks he will get.
It’ll be a game of whack-a-mole for Trump with increasingly brazen (and stupid) ideas as things get out of control. Of course, he’ll blame everyone but himself, but anyone who can’t see that at this point is too far gone from reality.
Can there be YCC segmentation, such as confining purchases to mortgages (MBS) to positively impact (unlock) the housing market, or does this operation have to be facilitated through Fed purchase of 10 and/or 30-year Treasury bonds?
Well, remember: The Fed supposedly wants to be out of the MBS-buying business entirely. Moreover, they want to shift the balance sheet in favor of Bills. I was going to go over this in the article, but it ended up being far too long for a Friday evening read, so I trimmed it down. But the issue here is that this is a Fed which ostensibly wants no MBS and a shorter WAM. Trump will eventually want bond-buying (i.e., duration buying) and although that will itself help mortgage rates (by putting downward pressure on long-end yields, particularly if Bessent tries his best to limit coupon auction size increases as best he can later this year/early next), it’s not far-fetched at all to suggest that if someone mentions to Trump the possibility that the Fed could facilitate housing market activity in a more direct way, that he’d demand it.
I spent a few hours prompting GPT5 with this:
A populist government is capturing the central bank with the intention to boost growth, when growth is already robust. Once the central bank cuts short term interest rates it is expected they will deploy yield curve control to prevent long term rates from going higher.
What are the consequences of this policy and how should investors prepare?
Let’s say you don’t own a house and have been wanting to buy one. You can afford it, but the combination of high prices and (relatively) high mortgage rates skews the rent vs buy decision pretty decisively towards “rent.” It feels stupid to buy a house now unless you’re trading up and paying cash. However, with the prospect of yield curve control on the horizon, and home sales stagnating just a bit currently–would it not make sense to buy now, take out a mortgage, with the expectation that rates will fall, prices will skyrocket further, and one could refinance into a (relatively) reasonable monthly payment in a year or two?