The United States and the Path Toward Yield Curve Control

I spoke with a colleague a couple of years ago about the possibility that the United States would eventually move toward some form of yield curve control similar to the framework Japan adopted in 2016.

The idea was met with skepticism because the United States had a materially smaller sovereign debt burden, the dollar remained the dominant reserve currency, Treasury markets retained exceptional depth, and the Federal Reserve had begun reducing its balance sheet.

The comparison has become more relevant as the sovereign balance sheet has expanded, the Treasury investor base has become more dependent on price sensitive private capital, long term borrowing costs have risen globally, and U.S. policy has become more active around both the long end of the Treasury curve and Japanese currency stability.

In August 2026, the U.S. Treasury announced that it would at least double buybacks of 10 to 30 year Treasuries from $2 billion to $4 billion per operation after long term yields rose sharply. The announcement produced an immediate decline in long term yields, with the 30 year Treasury yield moving from approximately 5.34% to 5.18% before part of the move reversed.

The size of the program remains small relative to total Treasury financing requirements, but its significance lies in the willingness of the fiscal authority to intervene more actively in the maturity segment where financing pressure had become most visible.

Earlier in August, the United States also coordinated with Japan during intervention to support the yen and encouraged the use of the Federal Reserve’s FIMA facility, which allows foreign official institutions to obtain dollar liquidity against Treasury collateral instead of selling those securities outright.

These actions do not constitute yield curve control. They provide current evidence that long term sovereign yields, Treasury market absorption, and the behavior of major foreign reserve holders are becoming increasingly important considerations for U.S. policy.

The U.S. and Japanese Balance Sheets

Japan’s sovereign and central bank balance sheets have developed much further than those of the United States.

U.S. government debt is approximately 126% of GDP on a comparable general government basis, while federal debt held by the public is approximately the size of annual U.S. GDP. Japan’s government debt is approximately 203% of GDP.

The difference becomes considerably larger when the central banks are included. The Bank of Japan’s balance sheet is approximately 92% of Japanese GDP, compared with roughly 21% for the Federal Reserve relative to U.S. GDP. Japanese government securities held by the BOJ are equivalent to approximately 74% of GDP, compared with roughly 14% of GDP for Treasury securities held by the Federal Reserve.

The comparison shows that Japan combines a substantially larger sovereign debt burden with much greater central bank absorption of government debt. The external position also differs materially: Japan reached this balance sheet structure as a net creditor with a current account surplus, while the United States is a net debtor running a current account deficit.

Japan’s history is useful because its monetary policy evolved alongside its sovereign balance sheet. Government debt accumulated over several decades while the BOJ reduced interest rates, purchased government securities, expanded its balance sheet, moved policy rates into negative territory, and eventually introduced yield curve control in 2016.

The United States remains far below Japan in central bank absorption, but it has already used many of the mechanisms that can influence the market clearing yield: maturity management, Treasury buybacks, large scale asset purchases, and explicit maturity extension.

The step it has not taken is targeting the yield itself.

The U.S. Balance Sheet Changed After 2008 and Again After 2020

In 2000, federal debt held by the public was approximately 33% of GDP and the Federal Reserve’s balance sheet was about 6% of GDP.

The financial crisis materially changed that relationship. Federal Reserve assets increased from approximately 6% of GDP in 2007 to more than 15% in 2008, and subsequent quantitative easing increased holdings of longer maturity Treasury and agency securities. By 2014, Federal Reserve assets had reached approximately 26% of GDP before contracting relative to the economy and reaching approximately 19% by 2019.

The pandemic produced a substantially larger intervention. Federal Reserve assets increased from approximately 19% of GDP in 2019 to 34% in 2020 and nearly 37% in 2021. Treasury securities held by the Fed increased from approximately 11% of GDP in 2019 to almost 24% in 2021.

The monetary base expanded rapidly alongside the Fed’s asset purchases.

Between January and April 2020, it increased from approximately $3.44 trillion to $4.84 trillion, or roughly 41%, while bank reserves increased from approximately $1.65 trillion to $2.95 trillion, or nearly 79%. Most of the immediate monetary expansion therefore occurred through reserve creation associated with Federal Reserve asset purchases rather than through an equivalent increase in physical currency.

The effects of this balance sheet expansion extended beyond the banking system. By purchasing longer duration securities and reducing the yields available on safer assets, the Federal Reserve lowered discount rates across financial markets. That supported higher valuations for equities, real estate and other long duration assets.

The distributional effect followed from asset ownership. Households that already owned financial and real assets participated directly in rising valuations, while households with most of their wealth in wages, deposits or cash equivalents received less of that benefit and later faced higher entry prices for many assets.

Monetary intervention therefore influenced not only the quantity of reserves and the level of interest rates, but also where wealth accumulated across the financial system.

Treasury issuance and Federal Reserve purchases operate through different balance sheets. Treasury creates government liabilities to finance federal spending, while Federal Reserve purchases exchange securities for reserve balances and reduce the amount of duration remaining in private hands.

Since 2022, these balance sheets have moved in opposite directions.

The Federal Reserve has reduced its securities holdings through quantitative tightening while Treasury has continued increasing the quantity of debt requiring market absorption.

Treasury Supply Continued Expanding After Federal Reserve Absorption Declined

Marketable Treasury debt increased approximately 893% from 2000 to 2025.

The significance of that increase becomes clearer when considered alongside quantitative tightening. Treasury expanded the stock of marketable debt from approximately $3 trillion to almost $30 trillion while the Federal Reserve eventually moved from large scale asset purchases toward balance sheet contraction. A greater share of incremental financing therefore returned to private and foreign investors at market clearing yields.

The quantity of debt requiring financing has increased considerably. The composition of the investors financing it has changed at the same time.

The Marginal Buyer Changes the Yield Equation

In 2006, marketable Treasury debt was approximately $4 trillion and private investors represented roughly half of the market. Today, the market is approximately $29 trillion and private investors represent roughly 73%, while the broader official sector represents approximately 27%.

The Treasury market has therefore become substantially larger while becoming more dependent on investors whose allocation decisions are sensitive to relative returns.

Foreign central banks accumulate Treasuries for reserve management, currency intervention, and liquidity. Commercial banks and regulated institutions hold them for collateral, liquidity, and regulatory purposes. Private investors operate under a different constraint because they can compare Treasury securities with highly rated corporate credit, foreign sovereign debt, equities, commodities, shorter maturity instruments, and assets denominated in other currencies.

As private investors become more important at the margin, the quantity and duration of Treasury supply can exert greater influence on the yield required to attract sufficient capital.

A simplified framework for a long term Treasury yield begins with expected short term interest rates, expected inflation, and the term premium. A larger sovereign balance sheet funded increasingly by price sensitive investors expands that framework to include the amount of duration supplied, fiscal conditions, the capacity of private balance sheets to absorb that duration, and confidence in fiscal and monetary institutions. These variables can influence long term yields independently of changes in the expected path of the federal funds rate.

The relative strength of U.S. corporate credit becomes important within this framework. Highly rated American corporations can offer identifiable cash flows, productive assets, established governance, and leverage that investors can evaluate against the yield being offered. The sovereign balance sheet operates under a different financing structure because persistent deficits require continued issuance.

Global investors can therefore remain constructive on American productive assets while requiring a larger premium to finance the federal government.

The marginal investor increasingly has alternatives, which makes the amount of capital required to clear Treasury issuance a more important component of the long term yield equation.

Treasury Has Increasingly Used the Short End

Treasury bills outstanding increased from approximately $3.64 trillion in 2022 to $6.40 trillion in 2025, an increase of roughly 76%. Notes increased from approximately $13.70 trillion to $15.39 trillion, or roughly 12%, while bonds increased from approximately $3.87 trillion to $5.13 trillion, or roughly 33%.

Greater reliance on bills reduces the amount of duration private markets must absorb immediately, but it increases refinancing frequency and makes federal financing costs more sensitive to the Federal Reserve’s short term policy rate.

The August 2026 decision to increase long end buybacks adds another form of maturity management. Treasury can issue more bills while repurchasing selected longer dated securities, changing the distribution of duration and improving market liquidity without reducing the underlying federal liability.

The immediate decline in the 30 year yield following the announcement demonstrated that relatively small operations can affect marginal pricing when positioning and liquidity are strained. The subsequent partial reversal also demonstrated the limits of buybacks when the underlying fiscal supply remains large.

Interest Expense Is Transmitting Higher Yields Into the Fiscal Balance Sheet

Federal interest outlays increased from approximately 1.5% of GDP in 2021 to more than 3% by 2025, while annual nominal interest costs have moved into the $1 trillion plus range and continue to rise as lower coupon debt matures.

The repricing occurs gradually because the existing debt stock refinances over time. A larger share of bills accelerates that transmission, while longer maturity issuance can lock financing costs for longer periods at the cost of requiring private markets to absorb more duration.

This produces the fiscal feedback mechanism at the center of the YCC argument. Higher market yields increase interest expense as existing debt matures. Greater interest expense contributes to larger financing requirements, which require additional issuance and place more sovereign debt back into the market. As the initial debt stock grows relative to GDP, the fiscal consequences of a given change in market yields become progressively larger.

Japan Reached Its Debt Burden With a Different External Balance Sheet

The comparison with Japan requires accounting for a major structural difference between the two countries.

Japan accumulated its sovereign debt while remaining a net creditor to the rest of the world. Its current account surplus is approximately 4.6% of GDP, compared with a U.S. current account deficit of approximately -3.8% of GDP. Japanese households, corporations, insurers, pension funds, and financial institutions accumulated substantial foreign assets, and Japan generated approximately ¥41.6 trillion of primary income in 2025 through interest, dividends, and profits on those investments.

The United States remains a major exporter of technology, intellectual property, services, energy, financial services, and capital goods, but it also runs a large goods deficit and remains a net importer of capital. Its net international investment position is approximately negative $27.5 trillion.

Japan therefore reached government debt above 200% of GDP with a substantial external asset base and persistent foreign income. The United States is increasing sovereign liabilities while continuing to depend partly on foreign capital.

This difference is important because Japan’s 203% debt to GDP ratio should not be treated as a mechanical threshold the United States must reach before similar financing pressures can emerge. The composition of the savings base, external accounts, investor base, maturity structure, and marginal source of sovereign financing all affect where that constraint appears.

Rising Japanese Yields Alter the Global Treasury Demand Equation

Japan is one of the largest foreign holders of U.S. Treasury securities, with holdings around $1 trillion.

For decades, extremely low domestic yields encouraged Japanese institutions to allocate substantial capital abroad. As Japanese government bond yields rise, the relative return available domestically improves and the incentive to hold foreign sovereign duration can weaken, particularly after currency hedging costs are included.

A sustained change in that relative return can reduce one source of structural demand for U.S. and European government bonds at the same time those governments are issuing larger quantities of debt.

Currency intervention adds another connection between the Japanese and American balance sheets. Japan can use foreign reserves when supporting the yen, and Treasury securities form part of those reserves.

The recent U.S. Japan intervention and Bessent’s support for expanded use of the Federal Reserve’s FIMA facility are important within this framework because FIMA allows foreign official institutions to raise dollars against Treasury collateral instead of selling those securities into the market. The facility therefore addresses the possibility that a foreign reserve manager facing dollar liquidity requirements becomes a forced Treasury seller.

Japan does not have unrestricted leverage over the United States because large Treasury sales would also affect Japan’s reserve portfolio and domestic financial conditions. Its importance comes from being a large structural holder at a time when the Treasury market has become increasingly dependent on private capital.

Where Treasury’s Tools End and the Federal Reserve’s Begin

Treasury can alter auction sizes, increase bill issuance, reduce longer maturity issuance, and conduct buybacks. These tools change the maturity and distribution of government liabilities without eliminating the underlying financing requirement.

The Federal Reserve has a fundamentally different balance sheet capacity because it can purchase Treasury securities with newly created reserve balances and remove duration from private markets on a scale Treasury buybacks cannot replicate. The United States demonstrated that mechanism after 2008 and again in 2020.

Japan ultimately used the same mechanism on a much larger scale. Government debt reached approximately 203% of GDP, the BOJ balance sheet reached approximately 92% of GDP, and government securities held by the BOJ reached approximately 74% of GDP. The BOJ eventually moved from determining the quantity of government bonds it would purchase to directly influencing the yield at which those bonds traded.

The progression can therefore be understood through the treatment of duration:

Treasury can redistribute duration. The Federal Reserve can remove duration from private markets. Yield curve control goes one step further by determining the yield at which that duration clears.

This is where Scott Bessent becomes particularly interesting.

Bessent’s career creates an unusual historical symmetry. He built his reputation as a global macro investor studying currency distortions, interest rates, and the consequences of government intervention. As Treasury Secretary, he is now confronting those same market forces from the position of the sovereign issuer.

Currency intervention with Japan, encouraging FIMA usage to reduce forced Treasury selling, shifting issuance toward shorter maturities, and expanding long dated Treasury buybacks all move toward the same practical objective: limiting pressure on the U.S. government’s financing cost. None individually constitutes yield curve control. Together, they demonstrate an increasing willingness to manage some of the forces determining where Treasury yields clear.

In sovereign debt markets, reflexivity becomes the constraint. Higher yields increase interest expense, higher interest expense increases borrowing requirements, and additional borrowing returns more supply to the market. Controlling the long end interrupts that feedback loop and buys time for the balance sheet.

The Relevant Constraint Is the Market Clearing Yield

There is no single debt to GDP ratio that automatically produces yield curve control.

The relevant relationship is between the yield investors require to absorb Treasury supply and the financing cost the federal balance sheet can sustain over time.

Economic growth can improve that relationship by expanding GDP and the tax base, while fiscal consolidation and higher revenues can reduce the amount of additional borrowing required. Treasury maturity management can alter how quickly the existing debt stock reprices, while monetary policy can influence financing conditions through both the policy rate and the central bank balance sheet.

Japan increasingly relied on the monetary channel as its sovereign balance sheet expanded.

The United States remains at an earlier stage, but the structure of its balance sheet has changed materially since 2000. Marketable Treasury debt increased from approximately $3 trillion to almost $40 trillion, debt held by the public increased from roughly one third of GDP to approximately the size of annual GDP, private investors became a larger share of the Treasury buyer base, bill financing increased, and federal interest expense rose substantially.

The Federal Reserve also demonstrated in both 2008 and 2020 that it can absorb large quantities of Treasury duration during periods of stress.

The recent expansion of long dated Treasury buybacks and coordination around Japanese currency intervention do not mean that U.S. yield curve control is imminent. They belong to a broader progression in which sovereign debt supply, the composition of the marginal buyer, foreign reserve management, and long term financing costs are becoming increasingly connected.

Japan shows where that progression can eventually lead. As the sovereign balance sheet grows, monetary policy becomes increasingly difficult to separate from the government’s financing conditions.

And when monetary policy increasingly absorbs the financing pressure of the sovereign, the adjustment does not disappear. It can migrate from nominal yields into asset prices, real returns, inflation expectations and the currency.

The relevant threshold will not be a particular debt to GDP ratio.

It will be the point at which the yield required by the market and the yield the fiscal system can sustainably carry begin to diverge.

-Kirandeep Kaur