Thursday, September 22, 2011

Operation Twist, how much actual effect is expected?

So Bernanke announced "operation twist" plans to sell short term treasuries while buying long term to keep yields low, i.e. lowering the cost of borrowing for the US government. The last time the Fed attempted this was in 1961, and it had lowered average yield by a meager 15 basis points...

Details from The Economist

Operation Twist has long been considered a failure. Early studies found little impact on yields, vindicating those who argued that the price of a security depends only on expectations—of inflation, for example, or monetary policy—not its relative supply. Eric Swanson, an economist at the Federal Reserve Bank of San Francisco, disagrees. Previous studies, he reckons, didn’t properly isolate the influence of Operation Twist from countervailing factors. By studying the behaviour of bonds right around announcements related to Operation Twist, he concludes the programme lowered yields by 15 basis points in total. 

Future yield expectations

Will US treasury yields become ultra low like that of Japan since the mid 90's?

It's possible, but unlikely given that we're expecting more US budget snafu in as soon as next month (Oct, 2011). At the same time, we really don't know where China stands around US debt, are they buying or liquidating? What's the deal with Isreal and Russia selling US debt? As it's likely that the expected 15basis point drop has already been priced in, yields will likely comply with "free" market forces in the days to come.

0 Reflections: