George Goncalves: Why the Fed Wants to Avoid Yield Curve Control

Published on
August 27th, 2020
32 minutes

George Goncalves: Why the Fed Wants to Avoid Yield Curve Control

The Expert View ·
Featuring George Goncalves

Published on: August 27th, 2020 • Duration: 32 minutes

Many have written off the bond market as the arbiter of truth with claims that the Fed’s intervention into the market has removed price discovery. In this interview, bond strategist George Goncalves argues otherwise and makes the case that there is still plenty of valuable information left in the long end of the curve. He also points out that the Fed has stepped back from the market recently, touches on the Fed’s ever-dwindling quiver of arrows as it relates to yield curve control, and explains why he believes they will do anything they can to avoid it. Additionally, he gives his short and long-term view on where yields are headed, arguing that although he doesn’t believe the low is in for yields, we may see 1.00% or higher on the 10-year before we get there. Filmed on August 25, 2020.



  • RG
    Richard G.
    30 August 2020 @ 10:38
    George, great presentation - thank you. If the Fed eventually peg the 10 year, do you think they'll peg of the 30 year as well?
  • JO
    Jayden O.
    28 August 2020 @ 08:48
    Always great to hear from George! How likely do you think the Fed will ramp up QE? If we enter a deflation / disinflation environment and bond yield stays low, will they be able to just back off from the "market"?
  • DP
    Duane P.
    28 August 2020 @ 04:26
    I don't understand why the banks would be in a liquidity trap if their excess reserves went to six or eight trillion.
  • SB
    Stewart B.
    27 August 2020 @ 07:35
    Great interview. Why doesn't the Fed set the price of a loaf of bread too? Surely this must be better than letting the customer and shopkeeper find a mutually agreeable and favourable price?
    • RM
      Robert M.
      27 August 2020 @ 18:22
      Government could issue ration cards like during WW2 that sells bread at fixed prices. They seem to believe they can control the consumer through their actions, they could copy the UK in their 50% free restaurant meal program and we could just all go out and eat.
    • GG
      George G. | Contributor
      27 August 2020 @ 22:58
      Thanks Stewart and don't give them any new ideas (esp. since they are running out of them) wouldn't want them to launch a LLF, Loaf Liquidity Facility...
    • JD
      Jimmy D.
      28 August 2020 @ 02:17
      I don't believe the Fed is incapable of creating inflation. Other than a few skeptical Republican senators the criticism from the senate is usally how the Fed isn't doing enough or how could there possibly be a coin shortage when you control coins etc. Would anyone really oppose the Federal Reserve buying oil and gas futures, sending out one time grants to resturants or any other stimulus they give out?
  • BH
    Bernard H.
    28 August 2020 @ 01:44
    Great to see some comprehensive bond market analysis. The interesting development will be how the market reacts if the Fed succeeds in holding the long end of the curve down whilst inflation becomes manifest on main street. The price of food and other essentials are already beginning to lift here in Australia...
  • MC
    Michael C.
    28 August 2020 @ 01:21
    Great, great piece. While it's pretty basic, I would have to liked to hear some discussion around the Fed policy transmission vehicle with regards to Congress, i.e. it seems like JaPo is begging Congress to pass some fiscal spending bills so the Fed has something to buy and not trample over the long end anymore than it has. That TGA fund may be worth examining along with lack of M2 velocity. And the repo window for hedge fund junkies...;) I get so tired of hearing the "brrr" machine bit and the Fed can just print money so game I thought the comments in the last 10-15 minutes were very telling that the can has been kicked down the road...similar to Raoul's framework on insolvency. Thanks!
    • GG
      George G. | Contributor
      28 August 2020 @ 01:39
      Thanks Michael - that is a good point, I have made it somewhere else over the course of the summer, but still an important one to stress. So yes, Fed is playing a bit of hardball with DC (esp. because if things really go pear-shape all of it comes on to the Fed B/S, including munis which is a source of contention for DC policymakers). TGA is also another example that they over did and borrowed more than needed. We are in the rebalancing act before we see another dip in eco-data.
  • DS
    David S.
    27 August 2020 @ 17:18
    Well-developed interview. Thanks. IMO we are in uncharted economic territory caused by all reaction to the pandemic from governments to businesses to individuals. The US economy and the government were already in trouble before the pandemic. We do not know what is ahead, to our left or to our right. We do not even understand what is behind us as data were distorted by every type intervention. All interventions are just a stab in the dark hoping for the best. The world will emerge from this crisis. We will defeat or learn to control the damage caused by COVID-19. The markets are just the sum of everyone guesses as no one can really see through the looking glass. With all the money printing, the only outcome I am willing to bet on is asset inflation. The companies that will make it through will be valuable but may already be overpriced. The fact that a company can go up 25% in market cap after earnings confirms to me that no one knows. DLS
    • RM
      Robert M.
      27 August 2020 @ 18:18
      If you are talking Salesforce, go up 25% and then layoff employees. Very strange environment.
    • ly
      lena y.
      27 August 2020 @ 18:25
      David, how retirees are going to fight inflation with cash position?
    • DS
      David S.
      27 August 2020 @ 21:15
      lena y. - I have some call position from Mr. Parrilla's presentation and a little in Bitcoin. The rest is cash. I will deploy hopefully after the world makes more sense someday. Biggest position is paid condo. Professionals cannot wait. I can. DLS
    • GG
      George G. | Contributor
      27 August 2020 @ 23:13
      Thanks David, yes we are in uncharted territory but we came into this crisis with the system already extremely fragile from leverage and malinvestments. We also were out of balance-sheet (or reluctance to lend or fund US rates products at low levels hence the repo crisis last year) and that gave the Fed cloud-cover to over-liquify the marketplace. They did too much but that won't stop them from doing more when we see the next risk-off period once we get out of suspended animation.
    • DS
      David S.
      28 August 2020 @ 00:40
      George G.- Thanks again for your presentation. I certainly agree with your comments. We jumped out of the plane before COVID. During COVID the parachute did not open. Now we are pulling the safety parachute with great hope. Eventually we will get through this. It is certainly true that the $US emperor has a limited wardrobe. It is ironic because many other governments have no wardrobe at all. I still would not bet against the $US in the FX market when economic realization steps in. Government liquidity is not an economy and extremely high P/Es are not forever. DLS
  • LJ
    Lynn J.
    27 August 2020 @ 16:56
    How the market will be affected by a negative interest rate in sometime long run? Crush or rally? I doubt FED is dare to set up a negative interest rate. It is the US, not Italy, not Japan, nor any other countries.
    • GG
      George G. | Contributor
      27 August 2020 @ 23:08
      I forgot to mention one part, negative rates in the US is hard because its the reserve currency, it would require all (ok not all but many) of those dollars to come back home to roost as negative rates in the US takes away the relative-value that foreign investors get out of the US bond market. Its obviously more complicated than that, but the US market needs to keep positive rates to keep greasing the wheels of the global economy (thus they will keep trying to create inflation until they cannot and then we will need to reinvent how the system is designed).
  • ly
    lena y.
    27 August 2020 @ 16:26
    Such a timely interview!
    • GG
      George G. | Contributor
      27 August 2020 @ 23:05
      Thanks Lena and glad we recorded it before the Fed changed its framework and went even further down the path towards Japan...
  • PJ
    Peter J.
    27 August 2020 @ 08:32
    Need this sort of bond coverage on a regular basis, excellent
    • MG
      Miguel G.
      27 August 2020 @ 18:01
      Agree George is awesome would love for him to pop up more often!
    • CM
      Cory M.
      27 August 2020 @ 19:35
      Agree, agree, agree. George is awesome, and bonds need more coverage.
    • GG
      George G. | Contributor
      27 August 2020 @ 23:03
      Thanks Peter, Miguel and Cory... I obviously am a huge fan of RV too. More than happy to do these one-off clips for RV but also to find a way to do more block and tackle reoccurring bond analysis/reporting...
  • FS
    Filo S.
    27 August 2020 @ 06:56
    Well done George! You laid out a succinct perspective on the outlook for rates. Hopefully we will see more of you on Real Vision. I also follow you on Twitter and appreciate capturing your streaming insight. We know that rates and the dollar are heart on sole of the markets. Thanks again for a very clear and rationale outlook. BTW - I sold all my long bonds last night, which I have held tightly since November of 2018. The easy money has been made and now time for some risk off vol.
    • GG
      George G. | Contributor
      27 August 2020 @ 23:00
      Thanks Filo - so glad we recorded this pre-Jackson Hole and the sell-off in rates... And yes easy money has been made all around in all assets.
  • RL
    Radu L.
    27 August 2020 @ 09:43
    there seems to be an issue with the transcript file , can you please check? ty
    • NC
      Nicholas C.
      27 August 2020 @ 09:53
      facing a similar issue here!
    • MG
      Marcus G.
      27 August 2020 @ 13:30
      yes, please fix the transcript file.
    • MW
      Max W. | Real Vision
      27 August 2020 @ 14:07
      Hi folks, problem should be fixed. Let me know if you have any other issues.
  • NR
    Nathan R.
    27 August 2020 @ 12:21
    Always a pleasure to listen to George. 2008 called. It wants its inflation headline back. Pro-YCC argument is belied by the declining Fed purchases and huge Indirects in recent spectacular OTR auctions. YCC? Looks more like the bond market doesn’t believe the Fed narrative on current ‘hot’ inflation nor for that matter do Eurodollars. That’s the biggest money calling bullsh*t. Wages stagnant, employment down, rent down, demographic drag, oil not moving, copper stuck....etc. Until Fed resorts to Window Guidance for it or we won’t backstop you (Bear Stearns 1998 mistake) juice loan growth, there will be no consistent inflation. Does that require a change in Fed Reserve Act? Don’t know. We are setting up more rent-seeking leverage for speculation not innovation.