YCCATRBA almost sounds like a cool new hip hop track no?

But it’s even better: Yield Curve Control at the Reserve Bank of Australia

Anyway.

At the Reserve Bank of Australia’s (RBA) December 1st meeting they voted to keep all policy options unchanged. This includes its target of maintaining 0.1% on three year Australian government bonds, a policy also known as Yield Curve Control (YCC).

YCC was first announced in March, with the RBA committing to buy any quantity of Federal Government and semi-government (e.g. state government) securities required to reach its yield target. The target was set to 0.25 in March, and lowered to 0.1 in November.

One of the concerns about YCC is that the commitment is open-ended. If investors got skittish and started selling bonds, causing yields to rise, the central bank would have to step in and purchase potentially enormous quantities of bonds.

The alternative approach is the quantitative easing practiced overseas, where the central bank commits to buying a certain quantity of bonds, but does not commit itself to achieving a set target for yields. This limits the central bank’s commitment.

In both cases the goal is to shift portfolios to other assets and reduce borrowing costs. The question is which requires the central bank to do less?

RBA Government Security Purchases

Purchase Date	Quantity (Billions AUD)	Total (Billions AUD)	Purchases as a % of outstanding long-term government securities
March	36	36.0	4.3
April	14	50.0	5.9
May*	1	51.0	5.8
June*	0	51.0	5.5
July*	0	51.0	5.3
August	10	61.0	6.1
September	2	63.0	5.9
October	0.0	63.0	No data on outstanding securities
November	5.0	68.0	No data on outstanding securities

Still, this quick and dirty calculation suggests the RBA has been able to anchor long-term rates quite quickly at minimal cost.** This is good news for advocates of YCC, especially when you consider that QE has left the Fed and the Bank of Japan with bond holdings in excess of 30% or 40% of GDP.

Lets quickly take a look at this from the Government’s perspective (drawing on the Australian Office of Financial Management’s data). We see an increase in long-term security issuance from April, just after YCC began. At the same time, short-term security issuance starts to decline from May. In other words, the government is taking advantage of the RBA’s effort to keep longer term borrowing costs down and loading up on longer-term debt.

Interestingly, this surge in issuance does not seem to be putting pressure on the RBA’s peg. Between May and July, the government raised nearly $100 billion in long-term debt. I do not have data showing breakdowns by maturity, but presumably some quantity of that was 3-year debt. Despite the increase in issuance over the period, the RBA did not need to purchase more bonds to maintain its peg.

There is clearly plenty of demand for government debt right now. The risk is that if private demand for public debt at that price were to decline (for whatever reason), then the RBA would need to purchase ever larger quantities of the debt to maintain the peg. For now, that does not look like a concern.

As I’ve said before, the government should take advantage of this to borrow for an ambitious investment program. I remain skeptical of stimulus overly reliant on tax write offs and incentives.

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The RBA separately announced a more traditional $100 billion QE program last month, with 19 billion already purchased. I will revisit these figures once more data on debt issuance becomes available.

*A small purchase was made in May but it did not change the overall quantity, so was probably below $1 billion in size. June and July had no purchases.

**The calculation is not perfect because I don’t have data on how exactly the RBA is spreading its purchases along the yield curve, and whether they are also purchasing short-term treasuries.