The ECB Takes a Holistic Approach to the Yield Curve – Robert Aro (01/28/2021)

When a central bank controls the yield curve, should we not call it yield curve control? Last Tuesday Bloomberg wrote about how the European Central Bank (ECB) is implementing what could be perceived as yield curve control. The phrase itself invokes the idea that a central bank will formally set a yield target on government bonds then commit to buying as many bonds as necessary to ensure yields don’t go beyond the target, as the central banks of Australia and Japan do currently. If the idea of a central bank buying “any bond necessary” is worrisome, perhaps that’s why the ECB doesn’t refer to their bond buying actions as yield curve control.

Currently in Europe, the ECB strives to manage the debt load of 19 different member nations, who each issue bonds on their government debt. In order to manage this, the ECB takes action such as:

buying bonds to limit the differences between yields for the strongest and weakest economies in the euro zone…

What the acceptable spread between these yields remains unknown, and is subject to change whenever planners see fit. The concept is that the ECB decides when yield spreads are too wide, or possibly too narrow, and takes corrective action. This action involves adjusting bond purchases in order to alter the difference in yields between member countries.

A question was posed to ECB President Christine Lagarde on Thursday’s Q and A after announcing rates will remain on hold and the accommodative stance will continue for the foreseeable future:

What is your reply to endless commentary that in fact the ECB’s already doing de facto yield curve control, without saying so?

Lagarde responded, without using the term yield curve control, explaining the more “holistic approach”…

We’re not riveted to any particular yield. We take into account multiple indicators that relate to the financing of the economy, and as I said, we believe that financing conditions are currently broadly favourable on the basis of that multifaceted, holistic assessment…

Per Lagarde, the ECB is not setting a firm ceiling on government yields while buying enough bonds to ensure this isn’t breached. They are not defining a particular ceiling on yields and are looking at various factors, adjusting bonds purchases accordingly. In her words:

It is a holistic approach, it takes into account multiple indicators, and, you know, bank lending is one, credit conditions is one, corporate yields is one, sovereign bond yields is one, and it’s by combining all of those that we try to assess whether the financing conditions are favourable or not.

Meaning, they will monitor a wide variety of conditions to ensure bond yields are at the appropriate condition, ultimately buying as many bonds as necessary to ensure those conditions are met. This still doesn’t seem to have a formal name. While it does not meet the traditional notion of yield curve control, it seems more like a floating or adjustable type of yield curve control, except we don’t know the target.

Who is to say which is better? Should a central bank explicitly specify what the maximum yield on bonds should be? Or should they simply take corrective action when they feel yields are going in what they consider the wrong direction?

To be fair, what the ECB is doing might not be called “yield curve control,” but it is the controlling of yields. And if this comes off as nothing more than an exercise in semantics or confusing, we must assume this too was by central bank design. As for the Federal Reserve, will they eventually implement yield curve control like Australia and Japan, or choose not to, like the ECB?


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