From the Collaborative Bond and Money Market Data Portal

Quantitative easing (QE) is a non‑standard monetary policy tool in which a central bank purchases large quantities of longer‑term securities—typically government bonds and, in some jurisdictions, agency or corporate assets—financed by the creation of central bank reserves. It is used when policy rates are at or near their effective lower bound, with the aim of lowering longer‑term interest rates, easing financing conditions, and supporting inflation and economic activity by altering the quantity and composition of assets held by the private sector.

Impact on money markets:

• QE increases the level of excess reserves in the banking system, changing the supply–demand balance in overnight funding markets and influencing where unsecured and secured money market rates trade within the policy corridor.

• With abundant reserves, short‑term rates tend to be anchored by administered rates (such as interest on reserves and standing facilities), while the need for frequent fine‑tuning operations is reduced, altering the structure and volumes of traditional money market activity.

• By changing the stock of high‑quality collateral in private hands and modifying incentives for banks and non‑banks to hold reserves versus short‑term instruments, QE affects repo rates, collateral scarcity or abundance, and the transmission of policy into instruments such as Treasury bills, commercial paper, and benchmark overnight rates.

Impact on bond markets:

• Large‑scale purchases of government and high‑quality bonds reduce the net supply available to private investors, compressing term premia and pushing down yields across the curve, especially at medium and long maturities.

• By concentrating demand in specific segments (e.g., certain maturities or asset classes), QE can flatten or reshape the yield curve, narrow credit spreads in targeted markets, and support valuations in adjacent asset classes via portfolio rebalancing.

• QE announcements and reinvestment guidance act as powerful signaling devices about the expected path of policy rates and balance‑sheet size, affecting bond yields not only through “stock” (cumulative holdings) but also “flow” (ongoing purchase pace) effects.