Fed to control the curve?
The USD has weakened ahead of the FOMC and awaits news on whether Yield Curve Control (YCC) will take place.
What is Yield Curve Control?
This is when the Federal Reserve buys bonds of a specific maturity in order to keep the yield at a pre-determined level
Why do this?
This control is done to keep borrowing costs low so that consumers and businesses are not under unnecessary strain. The NFP data on Friday meant that there is a chance that business returns to nornal too quickly. The break out in the 10 year Treasury bonds highlights the risk. The Fed will get nervous if rates look like returning higher, especially with large levels of borrowing. By controlling the curve you can contain that pressure to hike rates.
Who else has done this?
The RBA announced yield curve control on March 19. It set a target for the yield on three-year Australian government bonds of around 0.25% in line with its benchmark policy rate that was lowered to this level. The Bank of Japan targets a 10 yield bond yield at around zero. So, there is precedent for this approach. Lower yields on bonds make it easier for Gov't's to fund their shortfalls.
What happens if Yield Curve Control is used?
It should be USD negative as the yield advantage of the USD is kept in check. If the Federal Reserve are positive about the US economy after the better than expected NFP data from last Friday, and omit YCC, then the USD should rally. I am looking at gold to be a big beneficiary of the Fed using yield curve control and expect gold and silver buyers on the announcement tonight if they put YCC into place.
