The CB can fix the interest rate XOR the volume of securities outstanding at any given maturity (say, it can fix the yield of 30-year Treasuries IFF it is prepared to accept that it does not control the number of 30-year T-bonds in circulation).

The CB usually decides to fix the term structure of the outstanding sovereign bonds. But this is an atavistic holdover from the gold standard, where the term structure of sovereign bonds actually mattered. If the CB woke up one fine morning and decided to mess with the bond traders' heads a little, it could rearrange the term structure of the sovereign debt outstanding before lunchtime, without in any way impairing its ability to carry out its duties as a central bank. This would, obviously, cause the yield curve to change drastically - remember that the CB can fix the term structure XOR the yields.

Since the CB does not have to disclose its open market operations, and since the term structure of the sovereign bonds in private hands is not published in real time (if it is published at all), the pundits would interpret the new yield curve as being due to all sorts of things "liquidity preference," "short-term default risk," "inflationary pressure" or whatever bullshit just-so story could be made to fit the facts. When in fact it was just the CB adjusting its portfolio for no real operational reason. Or, in other words, noise that got taken for signal.

Conversely, if a bond trader wakes up one morning and decides to restructure his portfolio, there is no operational reason why the CB couldn't simply accommodate him and keep the yield curve where it is. That it chooses not to do so is just as much a policy decision as actively transacting in order to mess with people's heads was above. And so this, as above, is noise mistaken for signal.

Mind you, it's rather expensive noise. It costs the US taxpayers alone on the order of US$ 400 bn in totally unjustified subsidies. It's pretty much the only government-run lottery that has a payout above 100 %.

- Jake

Friends come and go. Enemies accumulate.