When standard interest rates aren’t enough, central banks use their balance sheet as a secondary lever to inject or drain market liquidity: Quantitative Easing (QE) - the ECB buys government bonds to flood the system with cash, pushing bond yields down and supporting asset prices. Quantitative Tightening (QT) - the ECB sells bonds or lets them mature, draining cash from the system and leaving investors to absorb the extra bond supply.
CURRENT READINGS
The FED currently holds USD 6.5tn in financial assets. It just added 7.4bn USD liquidity to markets last week by buying bonds. In light of this, net bond supply available to investors remains positive but keeps trending down further - US bond yields are not currently supported by monetary policy.
MARKET IMPLICATIONS
The rising balance sheet of the ECB shows a 1-year correlation of 0.79 (this is a strong positive correlation between the ECB balance sheets and bond yields moving in the same directions, implying no causation here as bonds are moving for different reasons) with rising 10Y German bond yields and of 0.45 with rising stocks in the Stoxx 600 index (mild). This means that ongoing quantitative operations had MINOR INFLUENCE influence stock prices and had NO CAUSAL INFLUENCE influence bond yields.
This is the Quick Playbook on Central Banks' Balance Sheets: when the ECB runs QE (Buying), it floods the system with cash and vacuums up bonds. This drives bond prices up and yields down, effectively flooring borrowing costs to stimulate the economy.
When the ECB runs QT (Selling/Maturing), it drains cash from the system and leaves extra bonds on the market. This pushes bond prices down and yields up, raising borrowing costs to cool things off.