The U.S. Federal Reserve’s $400 billion “Operation Twist” program to replace some shorter-term debt will continue to lower yields on longer-dated government debt, the Bank for International Settlements said.
Yields on U.S. Treasuries with more than eight years to maturity may decline about 22 basis points, Jack Meaning and Feng Zhu wrote in the Basel-based BIS’s quarterly report. At the same time, Fed sales of securities due in three months to three years may raise yields by an average of 60 basis points. A basis point is 0.01 percentage point.
The Fed and Bank of England’s initial rounds of debt purchases, started after the collapse of Lehman Brothers Holdings Inc., “significantly” lowered bond yields, the BIS said. Nevertheless, the impact from the central bank’s recent expansions of their programs may be limited, it said. Both central banks are resorting to so-called quantitative easing to stimulate their economies as the crisis in Europe worsens.
“Central bank purchases are unlikely to replace conventional interest rate policy in normal times,” the report said. “That said, they have proven to be useful tools in these extraordinary times to tackle the unique problems arising from the global financial crisis and the ensuing recession.”
The latest rounds of purchases will have a reduced impact because bond yields are already “very low,” while the effect is smaller the longer the programs last, the BIS said.
The Fed’s second round of asset purchases lowered yields by about 21 basis points on average, according to the report. The biggest effect was seen in securities with a remaining maturity of around 20 years, where yields fell by 108 basis points. The “maximum impact” is similar to that produced by the first bout of bond buying.
The U.S. central bank’s Large-Scale Asset Purchase program started in November 2008 and was expanded in 2009 and 2010. Operation Twist was announced in September.
For the Bank of England, the first round of purchases reduced yields by 27 basis points for gilts due in 5 to 25 years, according to the BIS. Gilts with about 12 years to maturity saw the biggest impact, with yields falling by as much as 74 basis points.
The U.K. central bank held its target for bond purchases at 275 billion pounds ($430 billion) last week. Policy makers increased the program, which targets mostly gilts, by 75 billion pounds in October, and some have signaled further expansion may be warranted. Its first 200 billion pounds of purchases were completed in early 2010.
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