Market Pulse: The Fed Could Start Doctoring the Yield Curve

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    Market Pulse

    Economists and Federal Reserve watchers threw around the idea of “yield curve controls” over the summer. They were dismissed at the time but last week’s Fed minutes suggest they might be coming back.

    Yield curve control means the Fed would buy longer-dated Treasury bonds to keep longer-term rates lower. Most of its asset purchases are now focused on shorter-term securities. That policy, combined with a stronger economy, has caused the yield curve to steepen.

    Last week’s Fed minutes (from the November 4-5 meeting) had these key lines:

    “Some market participants expected the Committee to eventually lengthen the weighted average maturity of the Federal Reserve’s purchases of Treasury securities.”

    “While participants judged that immediate adjustments to the pace and composition of asset purchases were not necessary, they recognized that circumstances could shift to warrant such adjustments. “

    A change like this could hurt sentiment toward bank and financial stocks that benefit from a steep curve. Housing could be viewed as a beneficiary. It could also depress the U.S. dollar and support high-multiple technology stocks.

    Fed Chair Jerome Powell appears in Congress tomorrow and Wednesday. Even if he doesn’t discuss the change this week, it could gain importance going forward.

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    David Russell is VP of Market Intelligence at TradeStation Group. Drawing on two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them apprised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.