By Steve Hassett:Much of the discussion around Treasury Bonds being in a bubble suggest the cause is mostly around flight to quality, where investors seeking to avoid other sovereign debt risk seek safety in the U.S., along with “Operation Twist” where the Federal Reserve is selling short term bonds and buying long-term bonds to drive down long rates. These explain part of it, but there is a more fundamental reason – expectations for low short-term interest rates to persist for several years.
By One Eyed Guide: Operation Twist, if undertaken by the Fed, will drive interest rates on longer bonds to new lows and should cause an immediate spike up in gold prices. Operation Twist would consist of the Fed selling short term maturity assets and purchasing longer term assets in an effort to lower long term interest rates.
By Evariste Lefeuvre: What is operation Twist? Operation Twist is a reference to a policy implemented by the Fed AND the US Treasury in 1961. This cooperative policy mix aimed to lower the long end of the curve without driving short-term interest rates too low. Under the gold standard, FX arbitrage led to gold outflows away from the US and therefore deflationary pressures (an unwelcome outcome in the recessionary context of the time), hence the requirement to put a floor to short-term rates.
PIMCO founder and co-CIO Bill Gross spoke with Bloomberg Television's Margaret Brennan today, telling Bloomberg TV that the Fed will likely shift focus to mortgage securities to keep borrowing rates low when Operation Twist ends in June.
WASHINGTON — The Federal Reserve is extending a program intended to further lower long-term interest rates, noting hiring has weakened, consumer spending is rising more slowly and the economy needs more support. The Fed will continue Operation Twist through the end of the year.
By Ron Harrod:Yes, we know that Operation Twist expires at the end of June, and the Federal Open Market Committee meets in less than three weeks. But let's get serious. We have now reached the point where U.S. Treasury bond rates plummet to record lows nearly every day. In this environment, does it make any sense to actively manipulate these rates even lower?
By Paul Quintaro
On Monday morning CNBC reported that in a survey the network had conducted, 70% of respondents predicted that the Federal Reserve would undertake an 'Operation Twist' in the near future. Further, almost 80% of respondents who predicted Operation Twist believed that the Fed would act this week.
A CNN article speculates that rather than another round of QE, the Fed may attempt "operation twist." That is, try to flatten out the yield curve by selling short-term bonds and buying long-term bonds.