Yield Curve Control (YCC)

Yield curve control (YCC) is a monetary policy tool in which a central bank sets a target for the yield on government bonds of a particular maturity and commits to buy, or sell, whatever quantity of those bonds is needed to keep the yield at or near the target. By fixing a point further out along the yield curve, the central bank caps longer-term borrowing costs in the economy rather than relying only on its short-term policy rate.

YCC is closely related to quantitative easing (QE), but the two differ in what is fixed. Under QE the central bank announces a quantity of bonds to buy and lets the price adjust; under YCC it announces a price, in the form of a yield, and lets the quantity adjust.

The central bank chooses a maturity, such as three or ten years, and a target yield or ceiling. If market yields rise above the target, the bank buys bonds, pushing prices up and yields down. If the commitment is credible, investors have little reason to sell below the implied price, so the central bank may need to buy relatively few bonds. If credibility weakens, the bank may be forced to buy very large amounts, expanding its balance sheet and the supply of central bank money.

A band around the target can give the market some flexibility. The central bank may also combine YCC with a negative or near-zero policy rate, anchoring both the short and long ends of the curve.

United States, 1942–1951

During and after the Second World War, the Federal Reserve pegged interest rates on Treasury securities at low levels to help finance government borrowing, including a ceiling of 2.5% on long-term bonds. The policy subordinated monetary policy to the Treasury's financing needs and became increasingly difficult as inflation rose. It ended with the Treasury–Federal Reserve Accord of March 1951, which restored the Fed's independence in setting monetary policy.

Japan, 2016–2024

The Bank of Japan introduced "quantitative and qualitative monetary easing with yield curve control" in September 2016, targeting a ten-year Japanese government bond yield of around zero percent alongside a negative short-term rate. The bank widened the allowed band several times, including in December 2022 and again in 2023, as global yields rose and the cap became harder to defend. It ended YCC, along with its negative interest rate policy, in March 2024.

Australia, 2020–2021

The Reserve Bank of Australia adopted a target for the three-year government bond yield in March 2020 as part of its response to the COVID-19 pandemic, initially 0.25% and later 0.10%. In late 2021, as inflation and rate expectations increased, the bank stopped defending the target and discontinued the policy in November 2021.

Suppose a central bank targets a ten-year government yield of 0.25%. Strong economic data lead investors to expect higher rates and to sell bonds, pushing the yield toward 0.40%. To defend the target, the central bank offers to buy unlimited quantities of ten-year bonds at a price consistent with 0.25%. Investors sell to the central bank instead of in the market, the yield returns to target, and the central bank's holdings of government debt rise. If the pressure persists, the bank faces a choice between buying ever more bonds or raising or abandoning the target.

Supporters argue that YCC can lower long-term borrowing costs efficiently, give clear guidance about policy and, if credible, require fewer bond purchases than open-ended QE. It can also reduce volatility in government bond markets.

Critics point to several risks:

• Exit problems: leaving a yield target can trigger abrupt market moves, as investors anticipate the change and test the central bank's resolve.
• Loss of control of the balance sheet: defending a target may require unlimited purchases.
• Market distortion: bond market liquidity and price discovery can deteriorate when one buyer dominates.
• Fiscal dominance: holding government borrowing costs low can blur the line with monetary financing of deficits.
• Currency effects: keeping yields low while other countries raise rates can weaken the exchange rate, as the yen did in 2022, and can affect carry trade flows.

YCC belongs to the family of unconventional policies used when short-term rates are near their lower bound, alongside negative interest rates, QE and forward guidance. Its focus on a specific point of the curve is intended to influence the term premium and expectations of future policy, which together determine long-term interest rates.