For several years now, we’ve been living by the Chinese saying “May you live in interesting times,” and so it is indeed.
If we had a time machine and went back to the 1980s and told our selves of that time what we would have experienced since 2001… our 1980s selves would surely look at us with eyes and mouth wide open: a far cry from the 1950-2000 sports almanac in the movie “Back to the Future”!
Yesterday, we had the Fed’s (non)decision, followed by the Fed Governor’s press conference, who answered questions: evasive in his answers but decidedly hawkish in his evasiveness.
It’s important to understand where we are and what’s happening and to learn new terms, first and foremost the one often referred to as YCC, or Yield Curve Control. So, below, I’ll explain the situation and gradually work our way towards the explanation of the new term.
The U.S. Treasury Department, as early as October 2023 when Yellen was Secretary, and subsequently until its last quarterly announcement on repayments (April 2025), signaled a shift in strategy toward greater reliance on Treasury bills (short-term obligations) to finance the growing federal deficit, while keeping the auction amounts for longer-term bonds and securities unchanged. This decision, apparently approved by Treasury Secretary Bessent despite his previous criticism of similar approaches, could lead to a significant increase in the issuance of short-term bonds, potentially creating yield increases: this happens because supply will exceed demand, and therefore investors will perhaps demand a higher return, even in the short term. Ironically, this strategy (increased short-term issuance versus more standard long-term issuance) was decided in 2023 precisely following a series of failed US auctions between August and September. To avoid a spiraling upward trend in long-term yields, which would have pushed rates to levels much higher than a potential short-term increase, Yellen reversed the financing ratio, overweighting short-term issuance over long-term issuance.
The current situation is the result of that 2023 decision, but that solution is only postponing the problem, not solving it, and today we are seeing it.
To manage market stability, the Treasury has also announced increased sales of Treasury inflation-protected securities (TIPS) and plans further marginal increases in the amounts of short-term Treasury bill auctions. This strategy is partly driven by widespread demand from money market funds (though we don’t actually know how widespread this demand is; we’ll find out soon) and the possibility of the Federal Reserve becoming a larger buyer of bonds. Current Treasury Secretary Bessent also predicts renewed demand from stablecoin issuers, suggesting a future in which these entities and the Fed will play a significant role in financing the government, potentially leading to an “overloaded Treasury curve”: an inverse yield skew, with higher yields for short-term bonds versus lower yields for long-term bonds. This effectively discourages investors from buying the long end of the curve and likely encourages a slow buyback of the long end by the US Treasury, thereby reducing debt and more easily controlling the curve.
Specifically, the Treasury announced a review of its bond repurchase program, aiming to increase the annual level to over $300 billion. This involves doubling the frequency of long-term operations and increasing liquidity support. These changes, effective August 13, 2025, are seen as “shadow QE” (quantitative easing) aimed at supporting the long end of the market and increasing flexibility with increased debt issuance.
This Yield Curve Control (YCC) effort by the Treasury, with the Fed currently being a major holder of US debt, will likely lead to a potential “merger” between the Fed and the Treasury in the more or less near future, ultimately leading to full yield curve control (while currently we are still at tentative levels).
The success of these seemingly opposing actions by the Treasury—increasing short-term bond sales while simultaneously buying back long-term bonds—is based on the idea of coordinated debt management and monetary policy objectives, potentially leading to yield curve control (YCC).
- Segmenting the Market: The Treasury is strategically segmenting its fundraising. It is using short-term Treasury bonds to meet immediate financing needs cheaply and efficiently, capitalizing on strong demand in that segment.
- Targeting the Long End: Simultaneously, through buybacks, it is attempting to influence the long end of the curve. This is not about financing deficits with long-term debt, but rather about managing the cost and stability of existing long-term debt and potentially signaling a desired range for long-term yields.
- Complementary Objectives:
Lower Overall Borrowing Costs: By minimizing the immediate cost of new debt (via Treasury bills) and trying to prevent long-term rates from rising excessively (via buybacks/YCC), the overall cost of servicing the national debt could be contained.
Economic Stimulus/Stability: Keeping long-term rates low generally stimulates the economy, as it reduces the costs of borrowing for businesses and consumers (e.g., mortgages, corporate debt). This can support investment and growth.
Credibility: If the market believes that the Treasury and the Fed are committed to managing the yield curve, this can reduce volatility and provide greater certainty for investors, which can further lower borrowing costs.
Potential Risks/Challenges:
While this strategy can be effective, it is not without risks. Historically, YCC attempts have sometimes led to significant balance sheet expansion for the central bank and, in some cases, inflationary pressures if not carefully managed. The perceived “merger” of the Fed and Treasury functions can also raise questions about the central bank’s independence. However, the current approach aims to balance fiscal needs with market stability and potentially a form of yield management.
We’ve had a clear example of YCC before, and that was Japan between 1990 and 2016. It’s worth remembering that this YCC experiment came after Japan’s worst recession ever, which was triggered by massive private debt that was now out of control, driven by inflation and the near-vertical increase in real estate values. During that period, Japanese companies increased their presence abroad, including through massive acquisitions.
Can you think of any parallels with the current situation?
Japan has implemented a yield curve control (YCC) policy for many years, administered by the Bank of Japan (BoJ).
The BoJ introduced YCC in 2016 as part of its ultra-expansionary monetary easing strategy to combat deflation and stimulate the economy. The goal was to keep the 10-year Japanese government bond (JGB) yield around a specific target (initially around 0%), with a fluctuation band.
However, after years of implementation, the BoJ began to modify and, more recently, terminate its YCC policy. This occurred gradually:
- Revisions and Increased Flexibility: Over time, especially in recent years, the BoJ has loosened the rigidity of the YCC, for example by widening the fluctuation band for the 10-year JGB yield.
- Abolition in March 2024: In March 2024, the Bank of Japan announced the end of its negative interest rate policy and, at the same time, formally abandoned its yield curve control (YCC) policy. This move marked a significant step toward the normalization of monetary policy in Japan.
But Japan had already used an impure form of YCC in the 1990s, not in the way we’ve seen it since 2016. In the 1990s, Japan faced deflation and prolonged economic stagnation after the bursting of the financial and real estate bubble. During that period, the BoJ implemented several unconventional monetary policies, including:
Zero Interest Rate Policy (ZIRP): Introduced in 1999, it was the first major central bank to lower interest rates to zero.
Quantitative Easing (QE): The Bank of Japan introduced QE in 2001, long before other major central banks. This involved massive purchases of government bonds to increase the monetary base.
These policies aimed to lower interest rates and stimulate the economy, but they were not specifically “Yield Curve Control” in the sense of setting a target for a specific point on the yield curve (such as the 10-year JGB yield). YCC was a subsequent evolution of these unconventional policies, introduced in 2016 to address the limitations of QE and the negative interest rate.
In light of all this, the articles that have been talking for years about a Japanification of the West are confirmed, given that we are (and the US is, but Europe will follow in a few months or years, like everything else) precisely following their roadmap.
This is a key point for understanding what is happening and for us to organize our portfolios by limiting the risks in the bond sector that are not immediately observable by the layperson: not because others are unable to see, but because this news, and even more so the connection between these events, even if distant in time, are difficult to interpret for those who do not follow them with extreme attention, as they do or should do as a profession.
