This video is a follow on from the previous video dealing with the Bonds, Risks and Yields and also Pricing. If you haven’t seen that video, I would recommend you doing so before watching this one.
Let’s begin …
Quantative Easing v Yield Curve Control
I should, at this juncture, make a distinction between Quantative Easing and Yield Curve Control.
Quantative Easing
Quantative Easing (QE) is a large-scale asset purchasing programme carried out by Central Banks. The assets that they buy are Government Treasury Bonds. With QE, the Central Banks can buy other securities besides Bonds, such as Mortgage Backed Securities etc.
QE is carried out to lower interest rates and also to stimulate the Economy. I won’t be going into the stimulating the economy aspect in this video however.
What I will say is that by buying a certain number of Bonds, the Governments and Central Banks are hoping that this will move interest rates in the direction they want.
When the Central Banks buys Bonds this artificially increases demand for Bonds and this in turn raises the price and lowers the rates. As mentioned in the previous video, with Bonds, prices and interest rates are inversely correlated, so this increased demand pushes up prices and puts downward pressure on interest rates.
Yield Curve Control (YCC)
Yield Curve Control (YCC) is slightly different from QE in that it is aimed at hitting a specific target for interest rates. With YCC, Bonds are bought in whatever quantity that is required to hit that designated target rate.
Summary
In summary, QE is carried out by the Central Banks buying Bonds and other securities in a specific quantities whereas, YCC is carried out by the Central Banks buying exclusively Bonds in whatever quantity required to hit a target rate.
Investopedia says they are “dramatically different”. In the same article it says, YCC “sharply differs from QE”.
Maybe I’m just being dumb, but I can’t see how they are so very different. There are differences but, so far as I can see, the two operations are not all that different.
One could argue that, in either case, the mechanisms are the same – buying Bonds. And their general aims are the same - to lower interest rates.
The only real differences between QE and YCC have to do with their focus and the quantities involved - the biggest difference being the quantities involved. There are no set quantities with YCC. So, YCC seems to be a more extreme operation – it’s without limit. With YCC, there is an attitude of “whatever it takes”.
Be that as it may, crucially, in both instances, currency creation takes place.
