This is not your grandmother’s “yield curve control.” There is only one thing that could force this ECB absurdity to end: a big bout of inflation.
By Wolf Richter and cross-posted from WOLF STREET.
The ECB, which is already infamous for imposing negative interest rates, has been doing something new, something no other central bank has done before or even needed to do before. Sources familiar with the matter told Bloomberg that the ECB is controlling the yield spread between the government bonds of the 19 euro states, for example the spread between German and Italian government bond yields. According to one of these sources, the ECB has specific ideas about what yield spreads are appropriate. And to heck with any kind of market.
The ECB isn’t doing “yield curve control” as the Bank of Japan and the Royal Bank of Australia are doing, but effectively “yield spread control.”
Bloomberg reached out to the ECB, but a spokesman refused to comment on it. The fact that this strategy has now been leaked is part of the effort to accomplish the goal – with communications, whether directly or indirectly, all being part of “jawboning” the markets, what’s left of them, into doing what the central banks want them to do. Jawboning is an official tool in every central bank’s official tool kit and often works better than actually doing something.
The ECB has long been doing “whatever it takes” to keep the currency union with 19 nations glued together, dodging its legal limits against monetary financing and shrugging off court challenges.
But unlike other central banks, it faces a complex situation. Each of the euro nations is issuing its own government debt. And the ECB has limits on how much debt it can hold of each country. It has been buying government bonds to manipulate down bond yields – not the German yields, which were already low, but Italian, Spanish, and Portuguese yields, the yield of countries with the weakest economies and the most indebted governments. It succeeded years ago with this goal, which had been thoroughly communicated.
What’s new is the “yield spread control” – and that it has a specific yield spread in mind. This is different from your grandmother’s “yield curve control”…