Bill Gross Warns QE3 Is Coming In The Form Of "Operation Twist" For The 2 Year

Tyler Durden's picture

Bill Gross released a very troubling tweet earlier:

Why is it odd? Because as David Rosenberg predicted two weeks ago when he expected that Operation Twist could be coming back with the Fed "capping" the 10 Year, Bill Gross, who has Larry "Fed Expert Network" Meyer in his ear and thus knows better than most what is coming, is predicting some "Twisting" though not at the 10 Year mark, but at the very short end. This is very disturbing. Because as we suggested at the end of May, QE3 will in reality be Operation Twist 2...

This means that Rosie's prediction that "the Fed would basically lose control of its balance sheet" could be about to come true, and in fact be far worse than expected, because it would mean that not only is the Fed no longer able to control the 10 Year but is concerned about controlling the 2-3 Year sector, a place on the curve that the Fed chairman has typically never had much to worry about.

Incidentally, we wondered earlier why not a single OTR 2 Year bond was tendered to the Fed during today's POMO. Here is you answer: why sell today at 0.44% when you can wait a month and sell them back to Brian Sack at 0.00%

Below we repost the article from May 31, as this topic may suddenly be everything that people are talking about.


In Preparation Of The Fed's Last Doubling Down: David Rosenberg Believes QE3 Will Be Nothing Short Of "Operation Twist 2"


It is no secret that to a deflationist like David Rosenberg bond
yields have to go lower... Much lower. With the 10 Year flirting with a 2
handle one would think he would be content. Alas no. In fact, as he
suggests in his piece from today, Rosie is convinced that the next
iteration of QE will be nothing short of a redux of the 1961 initiative
to kill the then gold exodus known as "Operation Twist" (recently dissected
by the San Fran Fed). Incidentally it was the same Fed that compared
QE2 to Operation Twist. It is only logical that Rosie would then suggest
that QE3 would be nothing short of a complete clearing of the 10 Year
bond in the market via the Fed in order to anchor expectations that the
10 Year rate would never go up (or reasonably "never") in the
biggest gamble of all: that the Fed will attempt to both control its
balance sheet and target Long-Term interest rates, a mission doomed to
fail...But not like that will prevent the Fed from setting off on such a
mission, especially following today's official confirmation of the
Housing Double Dip (someone page Jim Cramer). As Rosie says: "Now it is
doubtful that the Fed would ever target the long bond. In fact, the Fed
may even want it to be higher in yield to ease the pressure on radically
underfunded pension funds. While the Fed can either target its balance
sheet, which it has been doing with these QE measures, or target
interest rates, it cannot do both at the same time. So the next 'QE' will not be called 'QE' but rather something else — maybe Operation Twist 2 (OT2 — you heard it here first). The Fed would buy up all the 10-year notes needed to clear the market at the target "price" (yield). So depending on supply conditions and demand from the private sector, the
Fed would basically lose control of its balance sheet, but if in return
this policy is the one that blazes the trail for a turnaround in the
housing sector and a durable revival in the economy, so be it
." And keeping in mind that the true unspoken reason for Operation Twist 1
was to terminate the outflow of gold from the US to foreign bank
vaults, we find ourselves agreeing with Rosie that an insane idea such
as OT2 is precisely what the Fed would do to avoid a recurrence of the
1961 gold exodus (and attempt to give housing one last failed boost). As
many birds would be killed with one stone, the only downside, that of a
complete balance sheet implosion following OT2, certainly seems quite
acceptable to a central bank now officially run by sociopaths.

From Breakfast with Rosie:

just about everything that has to do with the economy is either
directly or indirectly priced off the 10-year part of the curve, it
stands to reason that this is the segment that matters most for the
The 10-year part of the curve is the oxygen tank for
the market and macro backdrop, yet the Fed in its latest QE round
centered its efforts more on the front- and mid- part of the curve.

is little doubt that the housing market is suffering from a variety of
obstacles, but what is clear from the consumer survey data is that households do not believe that interest rates will come down any further.
The Fed can only do so much to deal with a de facto vacancy rate of 10%
for the homeownership sector (double the norm) but every little bit
helps at the margin and certainly it can do a much better job at
influencing affordability levels to stimulate some demand growth.

need to be convinced that once they make the decision to finance a
purchase that they won't run into a period of rising rates that could
impede their debt-servicing capabilities
. This is where
the Fed can play a role in influencing expectations and it is critical
(this is particularly true for borrowers who are up for variable-terms

Look, we know that: (i) Bernanke is a
disciple of Milton Friedman, and (ii) one of Friedman's classic pieces
of economic research pertained to the 'permanent income hypothesis',
which postulated that it is changes that are deemed to be permanent, not
temporary, that induce a permanent change in economic behavior. This is
why the "permanent" Bush income tax cuts in 2000 worked so much better
than the temporary rebates unveiled in early 2008.

Therefore, at
the margin, in order to do even more to solve the ongoing depression in
the housing market, which continues to pose as a dead-weight drag on the
entire economy, it may well behoove the Fed in its next round of
stimulus, whenever that may occur (but it will, just not at 1,330 on the
S&P 500), to signal to the public its intent to take down and hold
down the most critical interest rate of all for the mortgage market — and that is the 10-year note.

think for a minute that this not being discussed — Bernanke talked
about embarking on such a scheme, if necessary, when he was still
governor back in 2002:

long-term interest rates represent averages of current and expected
future short-term rates, plus a term premium, a commitment to keep
short-term rates at zero for some time — if it were credible — would
induce a decline in longer-term rates. A more direct method, which I
personally prefer, would be for the Fed to begin announcing explicit
ceilings for yields on longer-maturity Treasury debt ... Lower rates
over the maturity spectrum of public and private securities should
strengthen aggregate demand in the usual ways and thus help to end
deflation. Of course, if operating in relatively short-dated Treasury
debt proved insufficient, the Fed could also attempt to cap yields of
Treasury securities at still longer maturities ... Historical experience
tends to support the proposition that a sufficiently determined Fed can
peg or cap Treasury bond prices and yields at other than the shortest
maturities. The most striking episode of bond- price pegging occurred
during the years before the Federal Reserve-Treasury Accord of 1951.
Prior to that agreement, which freed the Fed from its responsibility to
fix yields on government debt, the Fed maintained a ceiling of 2-1/2
percent on long-term Treasury bonds for nearly a decade.

Ben Bernanke, Deflation: Making Sure "It" Doesn't Happen Here, speech to the National Economists Club, Washington, D.C., November 21, 2002.

was otherwise known as 'operation twist'. There is certainly nothing
preventing the Fed from targeting the 10-year Treasury-note any more
than the Fed funds rate. But the funds rate is already near zero and as
such there is no incremental move there that can benefit the economy. But
targeting the 10-year note in much the same fashion is probably worth a
try and if there is anything else we know about Ben Bernanke. It is

(i) he will be late, not early. So, by
the time this comes the economy may well be back in recession, which in
balance sheet cycles tend to occur every three years, so mark 2012 down
in your calendar;

(ii) he is willing to be very
aggressive when the time comes — he has certainly proven that. Back in
2007 or 2008 for that matter, who believed that short rates were going
to vanish entirely and that the Fed would be buying assets by early 2009

it is doubtful that the Fed would ever target the long bond. In fact,
the Fed may even want it to be higher in yield to ease the pressure on
radically underfunded pension funds. While the Fed can either target its
balance sheet, which it has been doing with these QE measures, or
target interest rates, it cannot do both at the same time. So the next 'QE' will not be called 'QE' but rather something else — maybe Operation Twist 2 (072 — you heard it here first).

Fed would buy up all the 10-year notes needed to clear the market at
the target "price" (yield). So depending on supply conditions and demand
from the private sector, the Fed would basically lose control of its
balance sheet, but if in return this policy is the one that blazes the
trail for a turnaround in the housing sector and a durable revival in
the economy, so be it.

If the Fed were to be concerned
about the impact that any further balance sheet expansion could have on
the U.S. dollar, it could always nudge the short end of the Treasury
curve up in support of the greenback (short-term spreads matter more in
the FX market). By doing this, the Fed would also lend some much-needed
support to the troubled money market fund industry (for more on this
front, have a look at Low Rates Put Pressure on U.S. Money Markets Funds
on page 13 of today's FT). So much can be accomplished with such a
policy—the upside potential will be worth it.

politically, the Fed has to wait for the next downturn in economic
activity and reversal in the stock market so that those on Capitol Hill
that are lamenting the Fed's interventionist efforts end up begging for
more. This could come sooner than you think, but likely not until we see
the whites of the economy's eyes — and early signs are showing a
visible sputtering in growth.

One last item to note. If, say,
the 10-year note were to be capped at 2 1/2%, where it was at ahead of
the QE2 program last fall, compared with the current 3%-plus level, the
total return for a 10-year strip would come to over 10% in a 12-month
span. Now put that in your pipe and smoke it!

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swissinv's picture

and here we go - thx ZH

disabledvet's picture

thank God!  something we've never seen before!  here's what actually going to happen:

buzzsaw99's picture

This was obvious and inevitable. bonds bitchez

Cone of Uncertainty's picture

I'll give that little fucking biatch a twist all right.

I'll twist an snap his shit in a fucking figure four leg lock like Tito Santanna.


malikai's picture

So, if they cap the rate and its still net negative, who is going to buy the bonds?

buzzsaw99's picture

the fed's ginormous glubber gut. lol

malikai's picture

The world is awash with USTs, I don't know what the fuck they're pretending to be smoking, but its not working.

They have to seriously crash things hard and make the US look like a safe haven to get people buying US paper, and even when they do that, it won't last long. Either these guys are the dumbest bunch of fuckwits, and we deserve them. Or, they are by far the most cleptosociopathic masters the world has ever seen and we should submit to them as our overlords and evil gods, for we deserve them.

gmrpeabody's picture

All of our 401Ks and IRAs will be buying.

malikai's picture

Not my 401k or IRA. I cleaned them out and put that in real assets already. I'll smile and laugh the day the GRA is law. Maybe you're right though. GRAs would make for a great treasury scam, just like the SST.

buzzsaw99's picture

I'm afraid that you are missing the point. This move is not intended to induce people to buy Ts, in fact, quite the opposite.

swissinv's picture

the American way how to buy time - I hope OT 2 is not getting hacked

redpill's picture

Because price fixing always works out so well in the end...


francis_sawyer's picture

So this is was what he decided to "fix" in 15 minutes...

Cdad's picture

Yes...sure...why not?  Cap the yield.  Just line up the Fed police force in front of the bond pits and demand sub 2% on whatever junk you are printing.  Of course.  Why didn't I think of that?

But is anybody going to cap the retail price of an Abercrombie t-shirt, though?  That is the real issue facing to look cool...and avoidably so.  

Price control!  I want it now!

Hello fucking cosmic bunny hole.

Cdad's picture

Thanks, BlowHorn, for hiring a 16 year old girl to tell me that, "Markets are liking the upbeat economic data."  Huh?  I guess they figure that her translation of "less than abysmal" is more forgivable because...well, because she is 16.

In the meantime, utter blather continues to poor through my screen, the Blinky Bot gods apparently un fucking concerned despite how Bernanke literally has cornholed the entire congress with the "cut the budget or else...but if you cut the budget...either case an asteroid immediately impacting Wall Street."  Ok...sure...

Price controls, yield controls, and what redistribution?

What the fuck is going on?

Cue up Maria "no longer curious about anything" Bartiromo [but man that woman has got hair] and a dance line of criminal syndicate Wall Street bankers that will surely say, "Go long EVERYTHING."


Cdad's picture

And coming up on the outside rail....of course...Mutual Fund Redemption!

Who will come out on top...Crocodlile Algo or Mutual Fund Redemption.  The entire "Investing World" is on edge, like a super exciting episode of Dancing with the Stars, and over there, Ma Kettle is blowing on her IRA dice.

What the fuck is going on?  

Ricky Bobby's picture

LOL Great Rant! Rack it.

Cdad's picture

Behold...the power of the crocodile algo as it pertains to the Roach Motel [SPY] as it swallows the bile of today's utter nonsense...without so much as a gag reflex.

Who believes in this market anymore?  

And from the Blinky Bot gods, "Get out of our old traditional ways of fighting over raising or lowering taxes."  Right.  That'll fix things.  Do nothing...'cause the bond market says everything is just fine.

Never mind that institutions are throwing their money at bonds with the promise of just above zero yield.  That always signals the beginning of bull market runs...the kind that end up on the floor before you can reach the can.

Cue Bill "I should have stayed on leave" Griffith, and give him a godlike echo effect on his mic, and have him call the great price action on if the price action was the story...not the symptom...of the crocodile algo, of course, which is kickin' ass on Mutual Fund Redemption...another great stock market sign...right before every fucking thing goes black because some messaging system somewhere has an aneurysm.

I'm sure investors are clamoring for more.  Of what, they are not sure.  T-shirts, maybe...

What an absolute joke the syndicate is pumping these days.  If there is even one person in this country who is fooled by any of this, he should report to the starting line at the front end of the Greek escape tunnel...which I understand is about to get very fucking crowded.


francis_sawyer's picture

"what redistribution?"


PEOPLE redistribution... (into FEMA camps)... And leave your gold at the door on your way in...


Yits and the Yimrum's picture



do you get a credit at the snack bar FEMA for leaving your Eagles at the check in?

just like summer camp of old, with a little HFCS added to the mix

falak pema's picture

TD : ZH has coverage on Business Insider. Good Job.

falak pema's picture

Pray explain? Don't you want coverage of your article by other media?

Don't get that.

Concentrated power has always been the enemy of liberty.'s picture

I would say he views his work as something better than click-bait.  I know I do.


i.e. the typical businessinsider headling "The Dow is going to 64356543, find out what stock to buy now!  And also why your Financial Advisor won't help you."

falak pema's picture

Yes, OK. But on this occasion it was the whole ZH article w/o any BI comments or spin...Pure reporting IMHO. So the BI reader gets 100% TD input and 0% BI spin...

falak pema's picture

The target isn't BI, the target for ZH is BI readers...ordinary people who don't read ZH. Not every body in main stream USA reads ZH.

Problem Is's picture

Blodget: Howdy Doody or Opie Cunningham?
But Blodget is such a nice clean cut boy...

"He was ranked the No. 1 Internet and eCommerce analyst on Wall Street by <INSERT PHONY GROUP HERE>."

He was "keelhauled" by the dirty, prostituting Spitzer fellow...

"He was later keelhauled by then-Attorney General Eliot Spitzer over conflicts of interest between research and banking and booted out of the industry."

Since Opie failed to address any of the facts in this hammed up self bio... I am quite sure he wasn't guilty of anything...

Tuco Benedicto Pacifico Juan Maria Ramirez's picture

Bloomberg, Fox, CNN, ABC, NBC......are the old corporate dinosaur "establishment" dying media.  ZH, Infowars...are the "new" media and quickly becoming the real "mainstream" media at least until the CIA can put together a cyber false flag to shut them and us down. 


Tuco Benedicto Pacifico Juan Maria Ramirez

swissinv's picture

congrats tyler that you made it into Bloomberg ;)

Fancy Bear's picture

At least priorities are starting to be rearranged.

For recovery: jobs market>housing market>stock market

Silverhog's picture

Too late to place a cap on this mega deficit. There is no chance of austerity and massive taxes on a sputtering economy is suicide with deflation. Cutting taxes this late in the game would require several years for business to gear up and hire. Only real answer is to continue the dollar flood until the economy vomits with hyperinflation.

trav7777's picture

cutting taxes lol...will that print us up more oil?

tmosley's picture

How much oil does the US government consume every year?

Wouldn't it be better if that oil was used for productive purposes?

Here's a hint: taxes are a means of transferring purchasing power to the government, allowing those governments to compete for real goods like oil and food.  Cutting taxes, while holding other variables steady, decreases the government's allocation of oil.

But then, a death worshipper like you doesn't really understand that.  You just want us all to pay 100% taxes so you can force everyone to submit to your megalomaniacal plan to sterilize 50-97% of the human population.

bob_dabolina's picture

Christopher Langan whom has between a 195-210 IQ and regarded as the smartest man in America (same level as Rene Descartes and Leonardo Davinci) is saying the same thing.

You should look him up.

tmosley's picture

I believe in the theory of evolution, but I believe as well in the allegorical truth of creation theory. In other words, I believe that evolution, including the principle of natural selection, is one of the tools used by God to create mankind. Mankind is then a participant in the creation of the universe itself, so that we have a closed loop. I believe that there is a level on which science and religious metaphor are mutually compatible.

LOL, yeah, this guy is teh smrat!

Seriously, this guy is dumb as dogshit.  He claims you can prove the existence of God with mathematics.  Let's see the proof, douchebag!  But he won't post it, because it's bullshit, and would be instantly torn apart by any real mathematician as bullshit.

Shit like this is why IQ should never be used as a measurement for anything other than placement of children in special needs classes (both for gifted and retarded children).  Fuck, my IQ has been measured at 161, by professionals.  Given that, you and Trav should throw out your whole theory about IQs, since I am a "dumbshit".

The fact is that IQ is important only to children.  It has an effect on how quickly you learn.  As you get older, you either choose to continue learning, or you choose not to.  The tortoise and the hair is instructive.  The smartest person in the world is totally worthless once he accepts a false axiom as truth, and seals himself off from the possibility that he is wrong.  Just like Marx, who was a smart guy, but totally screwed up his assessment of humanity by the acceptance of a false axiom:  This lead directly to the deaths of hundreds of millions of people.  Just like Trav who would commit demographic suicide (how are you going to support 6 billion old people with only 210 million young people?) to "save" us from peak oil (the same dumbshit solution every Malthusian has defaulted to for hundreds of years).  Or like Ben Bernanke, who IS smart, regardless of how he is characterized here, but he has fallen for Keynesianism totally, and beyond redemption.

tmosley's picture

I should also note that there is NO WAY to know what the IQs of DaVinci or Descartes were.  They never took the damn tests!  What they did do is keep learning, keep studying, keep thinking EVERY day.  Sure, they were certainly above average, but there is ZERO evidence that they had astronomically high IQs.

falak pema's picture

The illuminati had a way of measuring a man's intelligence using a old instrument called an astrolabe and a plumb line...Based on the angle of the dangle of the plumb line and the angle of the sextant deviation to vertical that was projected on the ground  at mid-day precise when the man in question placed the plumb line over his reclining body exactly above his navel...they could determine his mental acuity to call that deviation between dangle angle and sextant deviation. Using pi squared and psi cubed divided by pythagoras's theorem square-rooted and divided by two thirds they could obtain a result that was precise to within one percentile range level. Now, amongst those to whom the question was thus put using this time honoured method by the jesuit monk, who was expert in contraption dangling and sextant angling, the hit parade of Illuminati ratings known to date were as follows :

Copernic : 169

Galileo : 175

Newton : 181

Descartes : 187

DA Vinci  197

Mona LIsa :201

That explains why Mona Lisa'a painting never left the great master; she was his master.

tmosley's picture

They see me trollin'...

Lord Koos's picture

I always thought it was Wan Hung Lo who came up with "the angle of the dangle" theory.

ElvisDog's picture

Oh, get out, DaVinci invented the helicopter in 1500-something. He had to be a genius. Anyone who sports that head of hair has got to be a genius.

gall batter's picture

Chris Langan:

People who wanted to have children would apply to make sure they have no diseases. Why do we have to do it through genetic engineering? Well, we have to let only the fit breed…. Freedom is not necessarily a right. It is a privileged [sic] that you have to earn. A lot of people abuse their freedom and that is something that people have to be trained not to do.


But who? Who does this training?

Chris Langan:

Well, I’d be perfectly willing to do it myself. Just put me in charge.


Vagabond's picture

The nail just got whacked on the head.

Hacked Economy's picture

+1, Silverhog.

Austerity measures at this point are not only politically volatile, but mathematically moot.  As so many of us here on ZH already understand, the remaining options are being logically drawn down to only two:  hyperinflation or default.

I personally believe we're going to see both within the next few years in the U.S., as some programs or debts are defaulted upon (or delayed, which is arguably a form of default in itself) to some degree, while Big Ben and Tiny Tim print us enough money to carry us over into the next year.  When we finally run out of road and find ourselves staring at the can we've been kicking for decades, it'll be game over for the U.S. dollar as we know it.

Cool avatar pic, Silverhog.  Makes me wonder if the pooch is trying to wiggle his way into a bite of the hot dog on my plate.  :)

blindfaith's picture

I say hyperinflation wins, and no one can pay their taxes as a result......which begs the question, who the hell in their right mind would want to run for President?

Go down in US history ( if there is one) as the fall guy for the end of a constitutional experiment.  Must be the perks, and directorships waiting in the wings.

Everyone knows what the answer is, there is no choice but to get it from the ultra rich one way or the other, of close up shop.

And, yes, if you freeze up the 10 year yield there is  chance the homes might start moving...provided ( of course) someone still has a fucking job to qualify for a 'pretty please' loan.  But, fear not the Chinese are buying US real estate ( just like the Japanese did).

treemagnet's picture

When the headline scanning bots at skynet figure out the first to sell wins - then it'll get interesting.