Courtesy of Mish.
One day after the ECB warns people to not speculate on interest rate caps, the ECB throws fat into the fire causing speculation on interest rate bands.
Reuters reports ECB mulls setting target bands for bond yields
The European Central Bank is considering setting yield band targets under a new bond-buying program to allow it to keep its strategy shielded and avoid speculators trying to cash in, central bank sources told Reuters on Friday.
Setting a band is an option gaining in favour among central bankers, but the decision would not be made before the ECB’s September 6 policy meeting, the sources said.
“That is one of the options that is currently being discussed in the working groups and will then be handled by the Governing Council,” a euro zone central bank official told Reuters on the condition of anonymity.
“That is the most likely approach, and also the one that could be most successful.”
Secret Sauce?
Supposedly “Keeping the intervention target secret could give the ECB an element of surprise and make it more difficult for investors to try to second-guess the bank.”
Quite frankly, that’s ridiculous, especially over the long haul.
Here’s the deal. If the ECB sets the upper bounds of the bands too low, there will be unlimited supply willing to sell to the ECB and the ECB’s balance sheet will reflect that fact.
Can This Work?
Let’s review what I said in ECB Considers Interest Rate Caps; Can Such a Scheme Possibly Work?
Theory vs. Practice
The ECB can “in theory” defend a price target on bonds, but only at the risk of owning every bond.
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