The unwinding of huge asset purchase programs, known as quantitative tightening (QT), has had a significant impact on world liquidity. The task of tightening the central bank balance sheets is complicated by the need to find a balance between reducing them and not disrupting the functioning of financial markets. The experience of the Federal Reserve and the Bank of England (BoE) shows how the specifics of the QT process shape the yields of their respective sovereign bonds, the reserves of commercial banks, and the money supply as a whole.

On the American experience, the size of the balance sheet of the Federal Reserve (the Fed) peaked during the pandemic and has been gradually reduced since. As of September 2026, the Fed’s assets amounted to approximately $6.74 trillion, comprising $4.56 trillion in U.S. Treasuries and $1.89 trillion in mortgage-backed securities (MBS). Despite aggressive runoff caps earlier in the tightening cycle, the Fed has managed to maintain a robust net liquidity profile, which hovered around $5.79 trillion in the fall of 2026. Meanwhile, the liabilities of the central bank have been transformed: thus, the amount of reverse repo agreements has declined significantly. The decline in the liabilities of the Fed through the sale of securities via the ON RRP has served as a “cushion” for money funds, which have absorbed the inflows of Treasury securities without a rapid drawdown of reserves of banks. As a result, thanks to the peculiarities of the implementation of QT, the Fed has been able to minimize the negative impact on the repo market, which was the case in 2019.

The BoE has also reduced the size of its balance sheet, pursuing a QT policy in parallel with the Fed. Following the COVID-19 pandemic, the Bank of England’s balance sheet reached a peak of 46% of nominal GDP and, as of mid-2026, was reduced to 25%. Thus, the BoE’s APF shrank from its peak of £895 billion to around £488 billion in a combination of passive and active unwinding of maturing bonds, including corporate bonds. The Bank of England actively unwinds its bond portfolio in order to maintain orderly markets. The release of the BoE’s liabilities through active QT operations has had a significant impact on the yields of UK government bonds. According to the data from early 2022 to September 2026, 10-year gilt yields rose by around 450 basis points. However, according to the calculations of the BoE, only 20-30 basis points can be explained by the compression of QT, while the increase in the expected policy rate and term premium expansion contributed to the majority of the observed yield increase. The future path of QT is largely defined by the lowest comfortable level of reserves (LCLoR). The fact that the central bank cannot simply reduce its balance sheet to the level of 2008 is dictated by the fact that under the LCR requirements, commercial banks need to hold huge amounts of liquid securities in order to meet the requirements of the LCR. This, in turn, means that if the central bank fails to provide the necessary amount of liquid assets, the short-term financing rates will be highly volatile. Therefore, the long-term dynamics of the size of the central bank balance sheets will be significantly curtailed, as they will need to serve as a key safe asset for the commercial banking sector.

Sources & Citations

  • "System Open Market Account Holdings and Balance Sheet Trends," Federal Reserve Bank of New York (September 2026).
  • "Asset Purchase Facility Quarterly Report: Q2 2026," Bank of England (July 2026).
  • "Quantitative Tightening and Central Bank Reserves in 2026," BIS Quarterly Review, Bank for International Settlements (June 2026).
  • "Gilt Yield Dynamics and Balance Sheet Normalization," United Kingdom Debt Management Office (DMO) (August 2026).