By Jamie McGeever
LONDON, June 7 (Reuters) - Governments can continue raising long-term debt in the knowledge that central banks' monetary policy will keep short-term yields anchored at low levels, according to a Bank for International Settlements study.
Central banks and treasuries have forged closer working relationships since the financial crisis erupted almost two years ago and will continue to maintain these ties, to the ultimate benefit of the national governments, the BIS said.
"For now, treasuries can issue long-term debt with interest rates tied to short-term bill rates in the confidence that monetary policy will keep bill yields low," the BIS study said.
"In doing so, treasuries stand to benefit from interest cost savings as long as short-term rates remain low. When economic activity quickens and interest rates rise again, they stand to benefit from higher taxes in compensation for higher debt servicing costs."
Central banks have slashed key policy rates [INT/RATE] -- close to zero in the United States and Japan -- and some have embarked on programmes to buy up bonds to bring down long-term borrowing costs and free up lending.
Limited room for manoeuvre on rates as they approached zero forced central banks to work more closely with treasuries, particularly at the longer end of the curve.
"The scope for interaction between monetary policy and debt management today has widened," the study said, noting that the Federal Reserve, Bank of England and Bank of Japan all seem "intent" on borrowing at the longer end, "as well-rated sovereigns tend to do."
But while long-term U.S. and UK bond yields fell sharply immediately after their respective quantitative easing programmes were announced earlier this year, they've since surged to their highest since late 2008.
This has fuelled debate in the financial markets on what central banks' reaction will be to a sustained rebound in yields -- that is, whether they will accept the rise in long-term interest rates as a consequence of economic recovery taking hold or whether they will step in, fearing that a rise in long term borrowing costs would choke the recovery.
For more on the BIS report, see https://www.bis.org/