Quantitative Easing: Definition & Meaning | Bondfish
Quantitative easing (QE) is a monetary policy tool in which a central bank buys large quantities of government bonds and other securities to inject liquidity into the financial system, push down long-term interest rates, and stimulate borrowing and spending.
What it means
When a central bank's short-term policy rate is already near zero, or it wants to add stimulus beyond a rate cut, it can turn to QE: creating new bank reserves to buy government bonds (and sometimes mortgage-backed or corporate securities) on the open market. The purchases push bond prices up and yields down across the curve, and expand the central bank's balance sheet.
The reverse process, in which a central bank lets its bond holdings shrink or actively sells them, is called quantitative tightening (QT). The U.S. Federal Reserve's most recent QT program officially ended on December 1, 2025; since then the Fed has used narrower "reserve management purchases" of Treasury bills to keep bank reserves ample, a tool distinct from full QE because it targets reserve levels rather than deliberately compressing long-term yields.
Why it matters for bond investors
QE directly affects bond investors because it is, by design, a large buyer pushing yields lower and prices higher, especially for the government and high-quality securities the central bank targets. Periods of active QE have historically compressed yields across investment grade and, indirectly, high yield bonds as investors reach for return further out on the risk spectrum. When QE ends or reverses into QT, that support fades and yields can drift higher as the central bank steps back from the market.
Related terms
This definition is for general information only and is not investment advice. Bond investing involves risk, including possible loss of principal.