What is yield curve control?

Yield curve control (YCC) is a monetary policy tool in which a central bank targets a specific yield on government bonds of a particular maturity and commits to buying whatever quantity of bonds is necessary to maintain that yield cap. Unlike quantitative easing, which specifies the quantity of purchases, YCC specifies the price (yield) and lets the quantity adjust as needed.

The Bank of Japan pioneered modern YCC in September 2016 when it set a target of "around 0%" for the 10-year Japanese government bond (JGB) yield, with a tolerance band that was eventually widened to plus or minus 100 basis points. The BoJ committed to purchasing JGBs at unlimited quantities to enforce this cap. At its peak, the BoJ owned over 50% of outstanding JGBs, a level of market dominance that distorted Japanese fixed-income markets and created challenges when the policy was eventually modified in 2024.

The Reserve Bank of Australia experimented with YCC from March 2020 to November 2021, targeting the 3-year government bond yield at 0.10%. The RBA abandoned YCC when rising inflation expectations made the yield cap unsustainable, leading to a chaotic exit as bond yields surged above the target before the RBA officially capitulated. This experience highlighted the risks of YCC: when markets lose confidence in the yield target, the central bank faces the choice of buying unlimited quantities of bonds (potentially fueling inflation) or abandoning the policy and suffering a credibility loss.

The Federal Reserve considered YCC during 2020 deliberations but ultimately rejected it in favor of traditional QE. The concern was that YCC could force the Fed into purchasing bonds in quantities dictated by market conditions rather than its own assessment of appropriate policy. For US markets, where Treasury issuance is enormous and foreign holders are significant, the commitment to defend a yield target could potentially require the Fed to expand its balance sheet far beyond what it would choose under traditional QE. Nevertheless, YCC remains in the toolkit and could be reconsidered if the US faces another zero-lower-bound episode where conventional tools are exhausted.