Quantitative Tightening (QT)
A central bank's deliberate shrinkage of its balance sheet by allowing bonds to mature without reinvestment, draining liquidity from the system.
Quantitative Tightening (QT) is the reverse of QE. The central bank reduces the size of its balance sheet by allowing maturing bonds to roll off without reinvestment, or by actively selling securities into the market. The effect is to drain reserves from the banking system and put upward pressure on long-term yields.
QT is the lesser-understood half of the monetary policy toolkit. It can tighten financial conditions independently of rate decisions, compressing liquidity that risk assets depend on. The interaction between the pace of QT and the Treasury's debt issuance schedule is an advanced but important driver of bond market dynamics.
Related Terms
Bond Yield
The return an investor earns by holding a bond — driven by its price, coupon, and time to maturity. Moves inversely with price.
BeginnerFederal Reserve
The U.S. central bank — its rate decisions and forward guidance move global markets more than any other single institution.
BeginnerInflation
The rate at which the general price level of goods and services rises, eroding purchasing power over time.
BeginnerQuantitative Easing (QE)
A central bank's large-scale asset purchases that inject liquidity into the system and push down long-term interest rates.
IntermediateTapering
The gradual reduction in the pace of a central bank's asset purchases — a step toward tightening that precedes rate hikes and signals the end of QE.
IntermediateYield Curve
A graph of Treasury yields across all maturities — from 3 months to 30 years — that maps the term structure of interest rates at a given moment.
Intermediate