Wednesday, September 21, 2011

Fed Announces Operation Twist

In a nutty program that will do nothing but moderately change the shape of the yield curve.  The Federal Reserve has announced that  it will extend the average maturity of its holdings of securities.

The Fed announced today that it intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less.

This is a complete sterilization move that will not impact money supply growth at all. I have to think Bernanke understands this and that he has created this smoke screen to throw Wall Street and MSM off the scent.

Meanwhile, the real action continues to develop deeper in the bowels of Fed operations, in the realm of bank reserves, where funds continue to leak out of excess reserves and into the economy. This is causing M2 money supply to expand at double digit rates. This will cause a manipulated boom in the economy, with the likelihood of very strong price inflation.


  1. The real news is the Fed is getting back into the MBS business. Going forward, reinvestments from prepayments, maturing Agency and Agency MBS will be directed into more MBS, not Treasurys. This inasmuch confirms a huge mortgage plan coordinated with the fiscal side (Obama) is coming down the pike. The most likely plan is the Soros/Boyce solution, Absalon. The Fed's part is to keep mortgage rates low while the plan is rolled out.

  2. This actually makes sense. It does two things
    1. Locking in historically low 30 year rates isn't dumb.
    2. It removes uncertainty as to whether holders of today's 2 year notes would just roll them (or could).

    I'd be interested to see if anyone has any idea as to who in the UK is buying all the increase in foreign holdings in treasuries. Total increase YOY about $350B total owned by UK $250B.

    Not bad for a broke country.
    see here:

  3. This should kill the earnings of the banking sector as its drives long term rates down and either holds or drives up short term rates. How is a bank expected to make a profit with such a tiny spread? I also have to imagine that we'll see the dollar rise as the dollar carry trade unwinds in fear of short term rates rising some.

  4. Bob,

    Do you still like being short 30 year treasuries? It seems like this action by the FED might hurt that play?

  5. I had a feeling about a month ago, thanks to Bob's pointing out excess reserves, required reserves and M2, that the Fed wasn't going to roll out QE3. My thought was that if they did, it would be due to fiscal reasons rather than monetary (i.e. Congress can't stop spending while Treasury auctions prove lackluster). Also, I don't think the banks are going to halt their growing deposits, not this early into it, and not with the Fed playing a strictly maturity role.

    Anon @ 4:15

    I think that the spread is more than substantial in the lending of fractional deposits, and it is clear that the banks are lending out reserves. I can see the Fed's actions having small changes on Fed and Treasury rates, but I don't see that making any real noticeable difference on longer maturity rates with regard to bank loans in the marketplace. The way I see it, the Fed is trying to hold down the curve without increasing the monetary base any further. The new money creation will be coming from the member bank lending, with the Fed attempting to hold rates firm with Twist. It might work for a while, but not for long. The larger problem as I see it is that while the Fed is holding off on net asset purchases, they also have no control over the number of deposits created. If price inflation gets going even more (and, it doesn't take much) with interest rates artificially held this low, things can get scary really quick.

    Needless to say, over the course of the next month or so, M2 is the measure to watch.

  6. Like QE2, this will have the effect of reducing long-term rates thus pushing up the price of long-term Treasuries which means that many more losses when the bond market bubble bursts. Shouldn't Fed policy be to try to prevent or limit the damage of a bubble rather than build it up?