We argue that quantitative easing (QE) and tightening policies constitute a dynamic state-contingent plan instead of a succession of independent interventions.

This view changes the main reason QE is effective by adding an insurance channel

to the static effect of absorbing bond supply in a given period. QE purchases occur in bad economic states (e.g., 2008-2009 or 2020) when the supply of government

debt increases. Increasing long-term bond prices in bad economic states increases

their safety, driving up their value and thus lowering ex-ante yields. We estimate

that this insurance channel alone lowers long-term bond yields by 75-100 bps. This

channel explains the prevalence of low long-term yields, low term premia, and low

yield volatility since the introduction of QE, despite the sharp increase in net government debt supply. Consistent with a state-contingent channel, implied volatilities

of long-duration risk-free securities fall substantially on QE announcements, even for

options with maturities out to 10 years. We calibrate a policy rule for asset purchases

to their historical path and include it in a quantitative term structure model. In the

model, state-contingent QE offsets term premia fluctuations in long-term bonds. The

insurance effect from this channel lowers long-term Treasury yields by 75bps ex-ante,

which explains about 75% of the total effect of QE on yields. The calibrated model

matches both broad patterns in bond yields and the response to QE announcements.