AUTOREFRESH 
Another Primer on Operation Twist
We’ve done it before but with the meeting tomorrow, here’s a review on ‘What is Operation Twist’.
It’s fairly simple. In QE1 and 2, the Fed bought about $2.9 trillion worth of Treasuries and mortgage-backed securities. Some of these assets mature next week; some mature 30 years from now.
The aim of the Operation Twist is to change the composition of the portfolio toward more long-term assets and few short-term assets.
They could either a) wait until short-term securities mature and re-invest the proceeds into long-term securities or b) speed up the process by selling short-term securities they own and using the proceeds to buy long-term securities.
The aim is to lower borrowing costs. The Fed has been successful in bringing borrowing for two years or less to nearly zero. Ten-year borrowing costs are near a 50-year low but the Fed wants to lower them further.
hello adam,
what do you think are the chances of the fed doing Operation Twist and perhaps even cutting the rate it lend to banks (already factored in)
AND most importantly, HINTING that they will do QE3 if the situation worsens?
Hi asdf,
For me, it’s all about QE3. Operation Twist is nothing and I would say there is a 90% chance it is implemented. The problem is that it changes nothing. At best, it skews lower borrowing rates by 10-15 basis points. If the Fed hints at QE3 (which I don’t expect) the USD will fall, stocks will rally, commodities will rally and gold will go to the moon. But, if the Fed is aggressive with Operation Twist, it is also a hint (albeit lesser) that QE3 is coming. Some of this is priced in so it will depend on how strong the hint is.
Mr. Bond, we’ve just received word from Felix Leiter that Goldfinger is about to launch Operation Twist…