Yield Curve Control: Bubbles And Stagnation

Central banks do not manage risk, they disguise it. You know you live in a bubble when a small bounce in sovereign bond yields generates an immediate panic reaction from central banks trying to prevent those yields from rising further. It is particularly more evident when the alleged soar in yields comes after years of artificially depressing them with negative rates and asset purchases.

(Video length 00:20:24)

It is scary to read that the European Central Bank will implement more asset purchases to control a small love in yields that still left sovereign issuers bonds with negative nominal and real interest rates. It is even scarier to see that market participants hail the decision of disguising risk with even more liquidity. No one seemed to complain about the fact that sovereign issuers with alarming solvency problems were issuing bonds with negative yields. No one seemed to be concerned about the fact that the European Central Bank bought more than 100% of net issuances from Eurozone states. What shows what a bubble we live in is that market participants find it logical to see a central bank taking aggressive action to prevent bond yields from rising… to 0.3% in Spain or 0.6% in Italy.

This is evidence of a massive bubble.

If the European Central Bank was not there to repurchase all Eurozone sovereign issuances, what yield would investors demand for Spain, Italy, or Portugal? Three, four, five times the current level on the 10-year? Probably. That is why developed central banks are trapped in their own policy. They cannot hint at normalizing even when the economy is recovering strongly, and inflation is rising.

Market participants may be happy thinking these actions will drive equities and risky assets higher, but they also make economic cycles weaker, shorter, and more abrupt.

Central banks have exhausted tools like repurchasing bonds and cutting rates, the diminishing returns are evident. Now they look to Japan, of all places, to look at yield-curve-control policies.

1 2 3
View single page >> |

Disclosure: None

How did you like this article? Let us know so we can better customize your reading experience.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.