Tuesday, October 11, 2011

Will 'Operation Twist' Turn into 'Operation Flop'

Ben Bernanke's Operation Twist is all about pushing longer term interest rates down. So guess what? They are heading higher.

The benchmark 10-year Treasury note yield rose Tuesday to its highest level in six weeks. The 10-year yield was at 2.16% at 3:00 EDT, up from 2.08% on Friday and the highest since Aug. 31. The 30-year T-bond yield was at 3.11%, up from 3.02% on Friday and the highest since Sept. 20.

Yields also rose in the shorter-term end of the bond market as the government sold $32 billion of new three-year T-notes at a yield of 0.54%. The yield on previously issued three-year notes has jumped from a low of 0.29% on Sept. 1.

The pressure on bonds is likely coming from many directions. Foreign central banks have upped their sale of Treasury securities since Bernanke announced Operation Twist. Many, correctly, now suspect that a double-dip recession isn't in the future, and things appear to be stabilizing in the EuroZone for the time being. Thus, a flight from the perceived safety of Treasury securities is developing. Further, all indications are that price inflation is accelerating, which will also put downward pressure on bond prices.

With all these down side pressures on bonds, many will use Operation Twist as an opportunity to unload their Treasury securities. In the end, Bernanke and his Operation Twist may turn out to be a total flop that did nothing but start the long anticipated downturn in bond prices.


  1. So this is what, the third bond market intervention that has marked interim highs in bonds?

  2. No, it's inflation & inflation expectations that have changed and are the dominant driver of yields - as the data from the 4th qtr will soon show.