Please ignore the fact that liners/snaggers/bottom bouncers often put yarn on their hook to create the pretense that the fish they are snagging (hooked outside-in in the scissors) are actually eating the yarn.
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Fishing yarn is a legitimate and deadly way to catch steelhead and salmon. As others have mentioned, a multi-color, nicely trimmed yarn ball from the size of a thumbnail down to a 10mm Jensen egg emulates roe as it drifts through the water. I had a guide in Alaska who used 4 colors in each tiny yarn ball: orange, cerise, peach, chartreuse. His theory was that on any given day, the fish would key on one of the colors. The other three didn't matter: as long as the fish saw one that was attractive, it would eat.
As long as the visibility was 3' or more, he'd fish yarn in preference to any other method as it was effective, cheap and easily replaced.
There are three ways to fish yarn:
1. On a fly rod with a sinktip, and swung or cast 45 degrees upstream and dead drifted (high stick nymphing)
2. Under a float just as you'd fish a bead, using a spinning reel, baitcaster, centerpin, or a fly rod and indicator
3. Drift fished on a 24" (plus or minus) leader--NOT 4' or 6'--with either split shot, a slinky or pencil lead to allow it to be drift fished and swung.