Is Twist 3.0 a precursor to YCC for the Fed?

Posted | 04/03/2021 / Views | 1158
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Yesterday we talked about the RBA’s yield curve control program, noting it was one of only a few central banks in the world implementing this strategy.  The most famous of course is the Bank of Japan which as a percentage of GDP or population has gone harder than any other central bank.  Yield curve control in part explains why.

All eyes are now on the Fed as they openly contemplate implementing it in the US as they see longer term bond yields rising to very uncomfortable levels.  Last night on Wall St was yet another reminder of how unstable things are in the face of this.  Topically Raoul Pal tweeted a reminder this morning about the difference between QE and YCC”

“I hope you all realise that QE is a fixed $ amount at any price, but YCC is a potentially unlimited amount of $'s at a fixed price. This mechanism moved 65% of the entire JGB [Japanese Bonds] market into the BoJ [Bank of Japan].”

Bankrate expanded, explaining: ““Quantitative easing is buying a specific amount of bonds every month or on a regular basis; yield curve control is more of a blank cheque,” says Greg McBride, CFA, Bankrate chief financial analyst. “It is about buying whatever quantity is necessary to keep yields below a certain level.””

Many are expecting Powel to announce a new Twist 3.0 tonight at a Wall Street Journal virtual event.  The Fed famously introduced the Twist concept between QE1 and QE2 in 2012.  Twist is an implicit YCC but buys longer term bonds whilst selling shorter term.  Outright YCC just sees the one-way buying of longer term bonds to reach their target.  Draghi’s “Whatever it takes” goes Fed.

YCC is seen as a last resort for many and raises the spectre of unintended consequences.  Bankrate explain:

“Once you cross a line that hasn’t been crossed before, it becomes more challenging to find your way back. If the market has a different idea of where the neutral 10-year yield stands and it’s higher than the Fed’s rate cap, that could unravel a new set of challenges once the Fed starts to withdraw those rate pegs.”

Whilst New York Fed President John Williams has said Fed officials are “thinking very hard” about it, the likes of Dallas Fed President Robert Kaplan are saying they are still skeptical.  The last Bankrate survey of the US’s top Fed experts put the odds at 79% it will happen eventually.

As they concluded:

“All of this illustrates just how wide the U.S. central bank sometimes has to spread its wings over financial markets and the economy while trying to prop up the system with rock-bottom interest rates. It isn’t so much about cutting borrowing rates anymore, but about throwing out all the stops against a crisis.

“The unintended consequence anytime you’ve got the central bank manipulating the money supply, interest rates and the financial system are inflation and asset bubbles,” McBride says. “If the more markets go up or the more asset prices go up, the more cautious one should be.””

The BoJ have had to gobble up everything with printed money to do it, the RBA is in the early days but Monday illustrated how quickly the printers can be fired up.  All eyes however are on the Fed.  

As a reminder… you can’t just simply ‘print’ more gold silver or Bitcoin.  You just can’t…