A Note on Modelling Yield Curve Control : A Target-Zone Approach

This working paper was written by Cho-Hoi Hui (Hong Kong Monetary Authority), Andrew Wong(Hong Kong Monetary Authority) and Chi-Fai Lo (The Chinese University of Hong Kong).This note uses a target-zone model to study the bond yield movements under yield curve control. The bond yield is assumed to be quasi-bounded in a band, but can breach a cap under a restricted condition of its dynamics. The empirical results using the 10-year Japanese Government Bonds suggest that this model can describe the yield dynamics under yield curve control. Co-integration results show spill-over effects from US Treasury yields to the Japanese Government Bond yield dynamics. While the bond yield was bounded below the caps, the conditions for breaching the caps were met in October 2018 and March 2021