馃攳
WHAT IS YIELD CURVE CONTROL (YCC)? | YIELD CURVE CONTROL EXPLAINED - YouTube
Channel: Learn With Mike
[0]
hi all welcome back to the channel in
[2]
this video you will learn
[3]
how yield curve control will impact your
[6]
life and your finances
[8]
i will start from explaining what the
[9]
yield curve is then i will explain with
[12]
practical example
[13]
what yield curve control is then i will
[15]
explain how
[16]
yield curve differs from qe which is
[19]
quantitative easing
[20]
lastly i will explain how does yield
[23]
curve control
[24]
affects the economy and what impact it
[26]
will have on your assets and savings
[29]
so if you're interested to learn stick
[31]
till the end of the video
[32]
and don't forget to smash the like
[33]
button like there is no tomorrow as it
[35]
helps me and the channel tremendously
[38]
okay let's jump straight to the content
[40]
enjoy
[43]
let's start with the basics what is
[45]
yield curve
[46]
the yield curve is a graphical
[47]
representation of the interest rates on
[50]
debt
[50]
for a range of maturities it shows the
[53]
yield
[54]
an investor is expecting to earn if he
[56]
lends his money for a given period of
[58]
time
[59]
the graph displays bond yields on the
[62]
vertical axis
[64]
and the time to the maturity across the
[66]
horizontal axis
[68]
the curve may have different shapes and
[70]
different points
[71]
in the economic cycle by its typically
[73]
upward slopping
[75]
there are three basic shapes of yield
[77]
curve normal
[78]
inverted one and flat the normal one
[81]
this is the most common shape for the
[83]
curve the normal ear curve
[85]
reflects higher interest rates for the
[87]
30-year bond
[88]
as opposed to 10-year bond if you think
[91]
about lending your money for a longer
[93]
period of time
[94]
you would expect to earn a higher
[96]
compensation
[97]
for that don't you so the positive
[99]
sloping yield curve
[101]
is called normal because a rational
[103]
market
[104]
would generally want to more compensate
[106]
for the greater risk
[108]
thought a long-term securities are
[110]
exposed to greater risk
[112]
the yield curve on such a securities
[114]
will be greater than they offered for
[116]
the low risk shorter terms
[118]
an inverted yield curve occurs due to
[120]
the perception of
[121]
long-term investors that the interest
[124]
rates will decline in the future
[126]
this can happen for a number of reasons
[129]
but the key
[130]
one is expectation of investors that the
[133]
decline in inflation
[135]
when the yield curve starts to shift
[137]
towards an inverted shape
[138]
it is perceived as a leading indicator
[141]
for economic downturn
[143]
such interest rate changes have
[144]
historically reflected
[146]
the market sentiment and expectations of
[148]
the economy
[150]
a flat curve happens when all maturities
[152]
have a similar yields
[154]
this means that the yield of tenure bond
[157]
for example
[158]
is essentially the same as of the yield
[160]
of the 30-year bond
[164]
yield curve is important for three
[166]
reasons first of all
[167]
it helps to forecast interest rates the
[170]
shape of the curve
[171]
helps investors to get a sense of likely
[174]
future course of the interest rates
[176]
a normal upward sloping curve means that
[178]
the long-term securities have a higher
[180]
yield
[180]
whereas an inverted curve shows
[183]
short-term securities have a higher
[184]
yield
[185]
the second reason is it helps banks and
[187]
other financial intermediaries
[189]
borrow most of their funds by setting
[191]
short-term deposits
[193]
and lend by using long-term loans the
[196]
steeper the upward sloping curve is
[198]
the wider difference between the lending
[200]
and borrowing rates
[201]
and the higher it is the higher the
[203]
profit for those banks
[204]
a flat or downward sloping curve on the
[207]
other hand
[208]
typically translates to a decrease in
[210]
profits of those financial institutions
[212]
that means that banks lose money and the
[215]
third reason
[216]
why ilcav is important because it shows
[218]
investors if
[220]
securities are overpriced or underpriced
[223]
how because the curve can indicate for
[226]
investors
[227]
whether a security is a temporary
[229]
overpriced or underpriced
[230]
if a security rate of return lies above
[233]
the yield curve
[235]
this indicates that the securities is
[237]
underpriced if the rate
[239]
of return lies below the year curve that
[241]
means that the security is
[243]
overpriced what is yield curve control
[248]
or ycc it is sometimes called as an
[251]
interest rate pex
[252]
it is basically when the bond yields are
[255]
set by the central bank
[256]
and they actually don't move it is
[259]
considered as a type of
[260]
unconventional monetary policy under
[263]
yield curve control
[264]
a central bank targets an interest rate
[267]
at a specific maturity
[268]
so basically central banks buys whatever
[272]
quantity of government
[273]
debt is required to hit that target
[276]
so ill cave control would require the
[278]
central bank to announce it
[280]
that you will not allow interest rates
[282]
for a portion of the curve
[284]
to rise above a certain rate for example
[287]
the fed would announce the rate let's
[288]
say
[289]
100 basis points which is one percent
[292]
and
[292]
state that it stands ready to purchase
[294]
all treasury bonds
[296]
of a certain maturity that trade above
[298]
this level
[299]
a central bank is trying to send a
[301]
message and is guaranteeing that
[304]
it will buy as many bonds as it takes
[307]
to ensure borrowing costs do not rise
[310]
the fed would target a specific interest
[313]
rates
[313]
level and stand ready to buy any
[315]
treasuries to keep that rate from rising
[318]
above this target
[319]
so basically and essentially yield care
[322]
control
[323]
is a policy that involves pegging or
[326]
anchoring
[327]
government bond yields at a specific
[329]
level
[330]
and what you see on the screen now you
[332]
see that
[333]
ill curve control by investopedia means
[336]
that the fed or any other central bank
[338]
would target a specific long-term rate
[341]
levels
[342]
it is differ from quantitative easing
[344]
and i'm going to explain it in a second
[345]
to you
[346]
and it also says that ill care control
[349]
is needed for economic stimulus
[351]
and short-term rates near zero so we had
[354]
formal fed chair bernanke and yellen
[357]
supporting the use of ycc and guess who
[361]
under the biden's administration will
[363]
potentially become
[365]
a treasury head it's going to be a janet
[367]
yellen
[371]
before i'm going to jump into explaining
[373]
the difference between the qe which is
[375]
the quantitative easing
[376]
and ycc which is the yield curve control
[378]
let me give you a practical
[380]
example how the hell curve control
[383]
could work in practice let's use iphone
[386]
here as an example
[388]
so iphone have icc just imagine that
[391]
apple creates a new iphone with eight
[393]
cameras but that's not all
[395]
the iphone pays you at ten dollars each
[399]
year
[399]
for two years straight the price for
[402]
this iphone is a thousand dollars
[404]
so you buy it five thousand dollars and
[406]
every year for the next two years
[408]
it pays you ten dollars the iphone
[411]
provides you that one percent yield
[413]
how it is a thousand euros divided by
[415]
ten which is basically one percent
[418]
let's say that the fed wants the price
[420]
of this latest iphone to be
[422]
packed a thousand dollars more
[424]
specifically
[425]
they want yield to be packed at one
[427]
percent this means
[428]
that the price of this iphone must be
[431]
packed a
[431]
thousand dollars but let's say that
[433]
people who own that iphone
[435]
they hate it they saying for example
[438]
that their selfies look
[439]
not so great and they want to sell it
[441]
the sellers cannot find
[443]
any buyer at thousand dollars so they
[446]
lower their price at an over 800 dollars
[449]
but if it's sold at 800 the yield goes
[453]
up
[453]
it will be now 125 how because it's 800
[457]
divided by 10 that is basically
[459]
125. so the fed doesn't like it at all
[463]
and they want the yield to be at one
[465]
percent so what the fed does
[467]
it basically steps in and buys all the
[469]
iphones
[470]
hated so much by people until enough
[473]
supply is removed that the price returns
[475]
to a thousand dollar
[476]
this is yield curve control in practice
[479]
replace this
[480]
iphone with a two year bond with a one
[482]
percent yield and now you're going to be
[484]
able to actually see
[486]
how yield controls work in practice in
[488]
real world so you might be wondering
[493]
is eel curve control different from qe
[496]
is not that the same
[497]
well the short answer is they different
[499]
how they differ
[500]
yield curve control is a different in a
[503]
one major aspect from qe
[505]
qe deals with a quantity of bonds why
[508]
ilcav control focuses on the price of
[510]
those bonds
[511]
for example the fed announces that it's
[514]
gonna
[514]
buy 1 trillion in treasury securities
[517]
buying bonds increases their demand
[520]
which increases their price
[521]
because bond prices are inversely
[523]
related to the yields
[524]
the higher price leads to a lower
[526]
interest rates basically
[528]
lower yields this is quantitative easing
[531]
but
[531]
under yield curve control the central
[533]
bank commits to buy
[535]
whatever amount of bonds the market
[537]
wants
[538]
to supply at its target price in the
[541]
earlier
[541]
qe example the fed was buying 1 trillion
[544]
worth of securities
[546]
in yield curve control there is no
[548]
specific dollar amount which is going to
[549]
be
[550]
being targeted the central bank fed or
[552]
any other
[553]
it will simply continue to buy until it
[556]
is at a price
[557]
they want once bond market internalize
[560]
the central bank's commitment
[562]
the target price becomes the market
[564]
price why
[565]
because who would want to sell the bond
[567]
to a private investor for less money
[570]
that they could sell it actually to fed
[572]
on any central bank
[573]
as a monetary policy tool yield curve
[575]
control is alternative to quantitative
[577]
easing
[578]
which has been used for much over the
[580]
past decade quantitative easing uses the
[582]
newly
[582]
electronically created money as a broad
[585]
brush strategy
[586]
to buy government bonds and other assets
[589]
yield care control
[590]
focuses explicitly on managing the
[592]
specific interest rates with the asset
[595]
purchase and sales
[598]
how does yield curve control affects the
[600]
economy
[601]
well in theory interest rates if they
[604]
pack
[605]
they should affect financial conditions
[607]
in the same way
[608]
how any other traditional monetary
[610]
policy does so
[612]
lower interest rates on treasury
[613]
securities should
[615]
results in lower interest rates on
[617]
mortgages
[618]
car loans and corporate debt that's a
[620]
good thing isn't it
[621]
higher real estate prices that's a good
[623]
thing if you own the house
[624]
higher stock prices again that's a good
[626]
thing if you own the stocks
[628]
and a lower dollar which is good for
[630]
emerging markets as well as the
[632]
commodity prices
[634]
well that is theory but also
[637]
what we have to consider is a risks
[639]
which basically
[640]
yield cave control brings like any other
[643]
unconventional monetary policy
[645]
a major risk associated with the yield
[647]
curve control policies
[648]
is as they put the central bank
[650]
credibility on online
[652]
they require that the central bank
[654]
commits to keeping
[655]
interest rates low over some future
[658]
timeline this is exactly what helps
[661]
encourage spending and investment
[663]
like i just mentioned but it also means
[665]
that the central banks
[666]
runs the risk of letting inflation rise
[669]
too fast
[670]
while they're sticking with this
[671]
commitment and i think we all have seen
[674]
a statement from different central banks
[676]
where they clearly stated
[678]
they will be aiming for higher inflation
[680]
than two percent
[682]
so looking again on the impact of the
[684]
yield cave control
[685]
on the economy we see that if you're not
[688]
the owner of the real estate
[690]
you're going to lose out if you have
[691]
money not invested in the stock market
[693]
and you're going to lose out
[694]
think about a situation where fed
[697]
or any central bank will commit to a
[700]
certain
[701]
yield curve control and they're gonna
[703]
pack for example
[704]
10-year bonds on three percent or any
[707]
other number
[708]
if the inflation rate will be higher
[711]
than the spec that basically means the
[714]
money
[714]
you own will be devaluating and that's
[718]
the reason
[718]
why ill care control is so risky we all
[722]
have heard from powell and his
[724]
commitment to run the inflation hot
[727]
which basically means that if they're to
[729]
now move into yield cave control
[731]
and the inflation will spiral higher it
[734]
will be destroying the money you have in
[736]
your pocket
[737]
so all the savers all the people who
[739]
don't own the real estate
[741]
don't have money in the stock market
[743]
don't own the gold
[745]
or precious metals or bitcoin they're
[747]
all going to lose out
[748]
and that's the majority of our
[750]
population and that is why
[752]
eel cave control is so risky so you got
[754]
two options
[756]
you can already position yourself in
[758]
those assets
[759]
or you can wait and when you're gonna
[761]
see in the newspapers in tv
[764]
that the yield curve control will be
[766]
implemented by any of the central bank
[768]
in the country you live then you jump on
[771]
those assets
[772]
it's not a financial advice i'm not here
[774]
to advise i'm only here to spread the
[776]
education and knowledge
[779]
okay that's all for this episode i
[780]
appreciate all of you for watching
[782]
and if you made it so far in the video
[784]
and you enjoyed it it would mean
[786]
a lot to me if you give it a quick like
[788]
please make sure also to subscribe to
[790]
the channel and hit that notification
[792]
button
[792]
all of this helps out with the youtube
[794]
algorithm thank you very much for
[796]
everything have a good one and i will
[797]
talk to you in the next video
Most Recent Videos:
You can go back to the homepage right here: Homepage