Quantitative Tightening
Definition
A central bank's reduction of its asset holdings, often by allowing bonds to mature without reinvesting the proceeds or by selling assets. It generally removes some monetary accommodation.
As the central bank buys fewer replacement bonds or sells existing holdings, private investors may need to absorb more of the available debt. That can put upward pressure on yields. The pace of balance sheet reduction depends on how the central bank carries out the policy.
Example
A central bank holds $10 billion in bonds that mature this month. It reinvests only $7 billion, so its holdings shrink by $3 billion.
Canada
What happens when the Bank of Canada shrinks its balance sheet?
One way is to let bonds mature without replacing them. If a $1 billion bond holding matures and the proceeds are left unreinvested, that holding falls by $1 billion. The policy rate is set separately.
Bank of CanadaUnited States
What does it mean when the Fed lets bonds roll off?
When a Treasury security matures, the Fed can let some or all of the principal go unreinvested under its runoff policy. For example, reinvesting $15 billion of $20 billion in maturities reduces holdings by $5 billion, all else equal.
Federal Reserve monetary policy guide