As Dealers Hoard 2 Year OTRs Ahead Of "Operation Twist 2" (Aka QE 3) They Flip Longer-Dated Bonds

Tyler Durden's picture

Unlike yesterday's POMO, which as only we pointed out first "curiously" saw not a single monetization of the OTR 2 Year bond QZ6, today things were just as predicted, with the just issued QQ6 amounting to the most monetized issue of all (at $1.6 billion), or a third of the entire $4.7 billion operation, just as expected this morning. Why is this not surprising: because today's operation targeted 5-7 year bonds, or, simply said, bonds to the right of where as we noted yesterday, Bill Gross now believes Operation Twist 2 will take place. Furthermore, as Zero Hedge concluded yesterday, when discussing the 2-3 Year point on the curve, " why sell today at 0.44% when you can wait a month and sell them back to Brian Sack at 0.00%." Well, the 2 Year is not 0.00% yet... But is now at the tightest it has been since November, touching on 0.39% as everyone is now rushing to frontrun the Fed's interest rate cap on the 2 Year, which could possibly be as low as 0.20%. Also, that Operation Twist is nothing short of another unsterilized Quantitative Easing program, we expect that stocks and much more importantly, commodities, will soon begin to price reality in. Expect much more clarity when the June 22 FOMC meeting is released. In the meantime, observe the massive outlier that the 2 Year has been over the past two days, or since the release of the Gross tweet.

Incidentally, if Gross is right about Operation Twist, he is also right about what will happen to the bond curve at the end of QE2, which now has just $47 billion to go.