Fed could adopt yield curve control

A report by Bloomberg’s Liz McCormick and Craig Torres says the US Federal Reserve (Fed) may implement yield-curve control to cap yields on government bonds of a chosen maturity. 

“For central banks that already cut short-term interest rates to zero, it’s a way to signal that they’ll stay low for an extended period while helping pin down longer-term borrowing costs too,” the report says. 

The Bank of Japan (BOJ) has been doing YCC since September 2016 to keep the 10-year yield around zero percent and the Reserve Bank of Australia (RBA) began doing the same in March this year. 

So far, the Fed has responded to the coronavirus crisis by buying Treasuries (US government bonds) in bulk and facilitating the flow of credit to businesses and governments. While the debt market isn’t pricing implementation of yield-curve control by the Fed at least through the end of August, some analysts expect the central bank to take that route by the end of this year. 

“We do expect yield-curve control by year-end,” said Priya Misra, head of global rates strategy at TD Securities in New York, according to Bloomberg. 

Analysts expect the Fed to follow the RBA and focus on the short end of the yield curve. At press time, the 10-year yield is hovering around 0.70% and the two-year yield is seen at 0.17%. 

YCC provides central banks flexibility to adjust (increase or decrease) bond purchases in response to the action in the bond yields. Upward pressure on yields is generally met with increased purchases and vice versa.