Yield Curve Control
AdvancedYield curve control is a monetary policy in which a central bank targets a specific interest rate on government bonds of a certain maturity, and buys or sells bonds as needed to keep the yield at or near that target.
Most central banks set short-term interest rates. With yield curve control, a central bank also commits to keeping a longer-term rate, such as the ten-year government bond yield, at a chosen level. If yields rise above the target, the central bank buys bonds, pushing prices up and yields down.
The Bank of Japan used yield curve control from 2016, targeting the ten-year government bond yield around zero, before gradually loosening and ending the policy in 2024. The US Federal Reserve capped Treasury yields during and after the Second World War, and the Reserve Bank of Australia targeted three-year yields in 2020 and 2021.
For example, if a central bank targets a ten-year yield of 0.25% and market pressure pushes it to 0.4%, the central bank buys bonds until the yield returns to the target.
Yield curve control can keep borrowing costs low and anchor expectations. But it can require large bond purchases, distort market prices and become hard to exit if markets doubt the central bank’s commitment.
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