Yield Curve Control (YCC)
Yield curve control is a central bank policy of targeting the yield on government bonds of a chosen maturity and buying whatever quantity is needed to hold it there. It caps borrowing costs further out along the yield curve.
Also called: YCC · yield cap · bond yield targeting · interest rate peg
Under ordinary policy a central bank sets an overnight rate and leaves longer yields to the market. Under yield curve control it also names a target for, say, the 10-year yield and stands ready to buy as many bonds as needed if the market yield rises above it. If the commitment is believed, the bank may have to buy relatively little; if it is doubted, purchases can become very large. The policy acts directly on the yield curve and on the term premium at the targeted maturity.
The United States ran an early version. From April 1942, at the Treasury's request, the Federal Reserve pegged Treasury bill yields at 3/8 percent and implicitly capped long-term bond yields at 2.5 percent, keeping wartime borrowing cheap. Defending the peg meant buying securities and expanding the money supply, and with inflation rising after the start of the Korean War the Treasury-Fed Accord of 4 March 1951 returned control of interest rates to the Fed.
The Bank of Japan adopted yield curve control in September 2016, targeting a 10-year government bond yield of around zero, widened the tolerance band several times and ended the framework in March 2024. Compared with quantitative easing, which fixes the quantity bought, yield curve control fixes the price and lets the quantity adjust. Its hardest moment is the exit, and a long-running cap can look close to monetary financing of the government.
In practice
Holding domestic yields down while rates rise abroad moves the adjustment elsewhere, usually onto the exchange rate. A cap abandoned under market pressure can hit bondholders and the currency at the same time.
Example
A central bank caps the 10-year yield at 0.25 percent. When the market yield drifts to 0.30 percent, it offers to buy unlimited 10-year bonds at a price equal to a 0.25 percent yield, and sellers take the offer until the market yield is back at the cap.
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Commonly confused with
| Term | How it differs |
|---|---|
| Quantitative easing | QE announces how much the central bank will buy and lets the yield move. Yield curve control announces the yield and lets the amount purchased move. |
See also
- Quantitative EasingQuantitative easing is large-scale buying of government bonds and other assets by a central bank, paid for with newly created central bank reserves. It is used to push down longer-term interest rates when short-term rates are already close to zero.
- Yield CurveThe yield curve plots the interest rates on bonds of the same credit quality across different maturities, usually government bonds from one month to thirty years. Its shape shows what markets expect for interest rates, inflation and growth.
- Monetary FinancingMonetary financing is a central bank funding government spending directly, by lending to the state or buying its debt when issued, with newly created money. Many legal systems prohibit it because of its link to high inflation.
- Term PremiumThe term premium is the extra yield investors demand for holding a long-term bond rather than rolling over a series of short-term ones for the same period. It cannot be observed directly and has to be estimated with models.
- Federal Funds RateThe federal funds rate is the interest rate at which US depository institutions lend reserve balances to each other overnight. The Federal Open Market Committee sets a target range for it, and that range anchors short-term dollar interest rates worldwide.