ECB has stopped reinvestments in maturing bonds

Bond purchases – how do they work?

Briefly put, Quantitative Easing increases the total amount of money available. Under the various QE programmes, the European Central Bank (ECB) and national central banks - which together form the Eurosystem - purchased bonds. These are large loans that can be traded as individual securities on financial markets.

Large-scale bond buying aims to fuel inflation by stimulating economic activity. This is how it works: purchasing bonds causes interest rates on long-term loans to fall as demand for these loans increases. These lower interest rates make it more attractive for firms, households and governments to borrow money for investment or spending, which in turn boosts economic activity.

The Eurosystem mainly purchased bonds from governments, but also from creditworthy firms and banks. Most of the purchases were made by national central banks – including De Nederlandsche Bank. Our traders executed more than 18,000 trades as part of the purchase programmes.

What exactly did the ECB announce in December?

At its monetary policy meeting of December 2024, the ECB confirmed it would stop "reinvesting". In other words, when the bonds that it holds mature it will no longer replace them by purchasing any new bonds. Completely stopping reinvestments is the final step in phasing out the Eurosystem's presence in the bond markets.

The Eurosystem already stopped its net purchases in mid-2022, meaning that the total amount of bonds held by DNB and the other Eurosystem central banks no longer increased. Since then, it has still made purchases, but only to replace a proportion of the maturing bonds. Letting bonds mature without reinvesting the proceeds is a passive form of Quantitative Tightening (QT), which is the mirror image of QE.

The Eurosystem balance sheet has already shrunk in recent years, in part because of QT (see Figure 1). More specifically, the Eurosystem still had €4,300 billion of bonds on its balance sheet as at 31 December 2024, compared to a peak of €5,000 billion as at 30 June 2022. This gradual transition has allowed financial markets to adjust to the Eurosystem’s reduced presence in euro area bond markets. From 2025 onwards, the Eurosystem no longer conducts any bond purchases, which will automatically shrink the balance sheet further. The reduction in bond portfolios will be particularly rapid in the first five to ten years, after which the remaining holdings gradually decrease to zero.   

Figure 1 - Eurosystem balance sheet shrinking again since mid-2022 and will continue to do so for the foreseeable future

Note to Figure 1: In addition to the purchase programmes, the balance sheet is also being reduced as the long-term stimulus refinancing operations (TLTROs) expire, which were launched during the crisis periods to promote investment. The final TLTRO operation was terminated on 18 December 2025. The shaded area on the right-hand side reflects forecast balance sheet developments. Source: ECB.

What does this mean for financial markets?  

With the Eurosystem slowly withdrawing from the market as an investor, and governments continuing to issue new debt, the availability of bonds in the market is increasing. The question is which investors will step in to absorb the available bonds in the market. Figure 2 shows that for the euro area as a whole, primarily investors from outside Europe have been stepping in since the Eurosystem gradually started to withdraw from the market.

This is not entirely surprising as these foreign investors held around 40% of euro sovereign bonds before QE started. During the QE period, some of these investors left because of the low interest rates. A smaller but notable investor category is private households. In some EU Member States – for example Italy and Belgium – the national government issued dedicated retail-focused bonds aimed at the household sector. These bonds can be an attractive investment for households due to their high interest rates compared to those offered in a savings account. In the Netherlands, the state has so far not issued any bonds aimed at private households. This type of bonds would be less attractive to Dutch households because of the lower interest rates on Dutch debt securities. 

Figure 2 - Foreign investors in particular return to the European sovereign bond market

Note to Figure 2: The figure shows European sovereign bond holdings as a percentage of outstanding bonds. Source: ECB SHS

This is not entirely surprising as these foreign investors held around 40% of euro sovereign bonds before QE started. During the QE period, some of these investors left because of the low interest rates. A smaller but notable investor category is private households. In some EU Member States – for example Italy and Belgium – the national government issued dedicated retail-focused bonds aimed at the household sector. These bonds can be an attractive investment for households due to their high interest rates compared to those offered in a savings account. In the Netherlands, the state has so far not issued any bonds aimed at private households. This type of bonds would be less attractive to Dutch households because of the lower interest rates on Dutch debt securities. 

How can the ECB ease monetary policy in spite of its shrinking balance sheet?

The ECB’s primary mandate is to safeguard price stability. The main policy instrument for setting the monetary policy stance is the set of ECB policy rates. To ensure that inflation returns towards its 2% target, and not below it, the ECB has started to gradually lower its policy rates (see also this and this background article). This is appropriate, given the current rate of inflation and the deteriorating economic situation. Instruments such as QE have proved valuable during periods when policy rates could not be lowered further.

QE programmes served to support inflation in the years following the euro crisis and during the pandemic, when the risk of deflation emerged. With these crises now behind us, it is important to phase out these instruments to minimise any side effects. This will also provide room for future purchases, should they ever prove necessary again. The balance sheet contraction will have a small tightening effect in the background, which we can offset by adjusting policy rates if necessary.