Charting SOMA Twist: Here Is What The $55 Billion In Monthly POMO Purchases Will Look Like Starting Shortly

Tyler Durden's picture

For anyone still confused what Operation Twist is (covered here first about 4 months ago), here is SocGen's Aneta Markovska, charting just what the flawed duration extension will look like (as a reminder, unless the 2s10s is steepened, and at that substantially, we may as well bury the banks: nobody is taking on new mortgages now regardless of where the 10 year is, just look at weekly MBA numbers. However, to make sure the US banking system expires, just flatten the curve completely, and it is game over for NIM). In a nutshell, SocGen believes that the Fed will dump $420 billion worth of 1.5-4 year USTs and use them to purchase bonds with a maturity longer than 4 years - ideally, this would be 20 Years (yes, they would need to be reinstated, and this is our view, not SocGen's) and 30 Years, and sell the 10 years. But since the Fed has zero practical world experience, one can only hope, knowing full well the end result will be yet another TARP to bail out the banks. From SocGen: "The next step from the Fed will almost certainly be for more easing and it will almost certainly be duration extension. The only question is September or November? Prior to the August employment report, the market was split 50/50 on the timing of the announcement. The report pushed the odds in favour of September which is our central scenario.We estimate that at the upper limit, the extension could amount to as much as $420bn in duration purchases, which would make it comparable in size to QE2. However, the Fed may not announce the full amount up front but instead give a monthly run rate and reevaluate at each meeting. Matching the previous run rate, we would expect the Fed to do roughly $55bn per month. This could take the Fed as far as April 2012, at which point inflation should have receded enough to put QE3 back on the table." We are not too sure just who will buy the 1.5-4 year bonds at current yields, but certainly some greater fool than us does and always will exist. What is important, is that dry powder for about $55 billion in POMO recycling will suddenly allow the banks to flip assets to greater fools yet again. As to whether this will work, like last year, we very much doubt it, especially since everyone will be buying gold and crude.

More from the very troubled French bank:

The Fed is likely to ease again. The most likely next step will be duration extension which was officially put on the table last week with a mention in the FOMC minutes. Importantly, Fed officials considered an active duration extension involving outright sales of short-term paper; this is in contrast with a passive extension where they Fed would reinvest MBS proceeds into the longer end of the Treasury curve. The only question that remains is when.

September or November?

Prior to last Friday’s employment report, the market was split 50/50 on September vs. November. Activity data, from retail sales to production and durable orders, have generally held up well through July, suggesting that the Fed may want to wait until November.  However, the August employment report tilted the odds significantly in favour of a September announcement which is our central scenario.

How much?

There are many potential scenarios but for illustrative purposes we show an extreme scenario where the Fed liquidates all of its holdings with maturities between 1.5 and 4 years and uses the funds to purchase further out the curve. Currently, this amounts to $420bn which would be roughly in line with the amount of Treasuries that the Fed allocated to the 4y-30y segment of the curve under QE2. Under the Fed’s own estimates, QE2 reduced the 10yr Treasury yield by about 20-30 basis points. Is equivalent to 100 bps of rate cuts. Operation twist, if taken to an extreme, could have a similar impact.

How fast?

The ‘twist’ will likely be spread out over the course of several months. Rather than announcing the total size upfront, we believe that  the Fed is more likely to give a monthly run rate and simply say that they will re-evaluate it at the next meeting. Under QE2, the Fed  increased its holding by $75bn per month of which $55bn was allocated to the long end of the curve (>4 years). Assuming the same monthly run rate and the earlier assumption that the Fed would be willing to liquidate everything in the 1.5y-4y bucket, QE 2.5 could  stretch over 7-8 months. If announced in September, it would take us through the end of April.

Will MBSs be included?

There is also the possibility of reinvesting back into the MBS market. By doing so, the Fed may actually get more ‘bang for the buck’. MBS spreads have widened out by about 30 bps this year, particularly following the US sovereign downgrade. By investing back into  this sector, the Fed could make a more direct impact on mortgage rates. For now, however, this is not seen as the most likely scenario.

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BaBaBouy's picture

PRINT Bitchezz ...


And Gold $5K Next Stop.

The They's picture

This is Qualitative Easing rather than Quantitative Easing.  All this is just semantics however: printing is printing.

TruthInSunshine's picture

Wrong. Even if this analysis was remotely rational, selling one class of bonds to buy another class of bonds adds 0 liquidity.

SheepDog-One's picture

'Monetize our own debt, then roll it over and refinance it'...never going to work FEDtards. The greater fools are already living under a bridge.

kengland's picture

Not true. PD's will most surely front run this selling short and buying long. When they take the proceeds and buy risk assets...



FreedomGuy's picture

Well, as far as I can see it does some good things for the Fed and the U.S. Indirectly. With the crushing amount of debt the US is taking on, spreading the risk and payments out 10, 20 or even 30 years is a gift. Does any sane person believe sub-4% 30yr treasury rates will hold up for 3 decades!?! If inflation takes off then traders will take huge losses and the Fed and US government will skate. Tax cheat Timmy Geithner needs to follow suit and roll the current debt from the stupid short terms to longer terms if he can. Right now, buyers are not buying them to make money but to avoid losses in the stock market.

Thomas's picture

Won't this flip the yield curve on its head?

sun tzu's picture

Depends on how far they push it

DefiantSurf's picture

and how exactly does "operation twist" accomplish any of the FED's mandates?

I cannot see it doing anything other than dragging out debt servicing for the government, kind of like refinancing your house to pay off your car? I think in the credit markets they have a name for that, I think its called "kiting"


Withdrawn Sanction's picture

This cannot be an accurate prediction. Such an action, if undertaken by the Fed, will flatten the yield curve and along with it, bank profits. Maybe they've given up trying to engineer a bank profit revival w/the yield curve.

Anonymouse's picture

I've been wondering about that for a while.

In addition, extending the duration of the Fed balance sheet adds risk to that balance sheet.  Should interest rates rise (i.e., the Fed's manipulation of the yield curve become anything less than perfect), the garbage backing the dollar will fall rapidly in value.

Yes, the Fed has created a negative liability to cover losses so that the book value of the equity stays above zero, but at some point 1) taxpayers will find out about how the Fed is not just screwing their investment and savings decisions, but also putting them on the hook for the crap investments they made to buy off the banks, and/or 2) the market may see an insolvent (whether actually or effectively insolvent) Federal Reserve as adding some minute level of risk to the USD.

That this doesn't seem to be a factor is just one more indication that we have gone past punting, gone past Hail Mary passes, to some as yet uncoined analogy to sporting desperation.

Todd Horlbeck's picture

I don't see how QE3, 4, 5, etc. is going to matter.  The Federal Reserve has to find a way to bypass the banks and get money to the public directly.  Until then, inflation is not a threat, because the banks are not going to lend and of the newly minted Fed money.  Taking a treasury off a bank's balance sheet and replacing it with cash is meaningless if the cash won't be lent.  It also doesn't fix thier problem assets which is the reason they won't lend.

The only way the Fed can inflate is via the banks, and if you know any bankers, ask them if they are willing to lend, or even loosen standards?  The answer will be NO.

My answer: put a "retail fed desk" in every bank to underwrite non-recourse consumer and home loans turned down by banks stricter guidlines. They can call these loans "retail treasuries" on their balance sheet, and create Federal Reserve notes to give to consumers.


Until I see this, gold's direction is unclear.







FreedomGuy's picture

Good point, Todd. I see it the same way. Deflation is balancing any Fed moves. Unemployed and underemployed and people with sinking incomes cannot buy much. Inflation is in check through the wrecking of the economy.

It's like giving one player (the banks) all the money in Monopoly. If that player sits on it nothing happens to the prices on the board. The Fed is limited in it's ability to get money to the public. That's why a credit expansion usually precedes inflation. Now, if Congress had done a tax holiday or some other direct distribution then Fed actions might have the desired effect...although no guarantees. People are still deleveraging themselves.

narnia's picture

TARP II is right around the corner.  that's their means of getting this "spending" in the politically favored pockets to supposedly drive the inflation.

I personally see a reverse twist.  I think they'll bury the 2-10 (below that is already buried) and force all the reinvesters, the people who think they're smart buying longer term to frontrun twist & risk off traders into longer term maturities.  

Then, the Treasury will play in the 1 - 4 space to finance the $4-5 trillion the 2011, 2012 & TARP II deficits will require.

Thomas's picture

I think the Fed doesn't have a clue and is starting to hurl Hail Mary passes on every down because the wishbone isn't working anymore.

FreedomGuy's picture

Plausible. Fiscal responsibility tells me they should buy the longer term so they don't have to roll super low T-bills into higher rates down the road. However, the temptation for the negative real returns and short term free money is probably too much, TARP or not.

Mathematically an end game has to appear..

Anonymouse's picture

But you are looking at the economy as a closed system.  It is not.

It has long been my opinion that the proximate cause of (hyper)inflation will be loss of confidence in the dollar.  We're not there yet, but the Fed cannot long alter the laws of physics.

kengland's picture

So will the PD's take the proceeds from the long end and buy risk assets? What will be the market effect of this?

FreedomGuy's picture

Good question...and at what price?

bgilliam83's picture

Thank GOD i didnt unwind my spam trade.  This site is turning into a rag!

The They's picture

Please expand and explain.  Until then -1.

kito's picture

@bgilliam83-youre slipping there buddy. be wary of the dark side......



djsmps's picture

That should create 2 million jobs.

urbanelf's picture

I doing the jumble in the morning paper thinking to myself that I might creates some new jobs if only someone would lower the long end of the yield curve.

pods's picture

It is create or SAVED, that way they can make it whatever number they want.


adr's picture

So what will all this paper pushing and debt swaps actually do for the common worker struggling to actually make it on his own?

With current job propects peaking around $10 an hour the average joe is better off on welfare, food stamps, and medicaid.

Housing is dead and full employment is dead. Inflation is destroying everything. Is deflation really that bad? We've tried everything else. We really don't need to deflate to 1950, just deflate prior to the dotcom bubble. We were actually OK in 1997. Homes were affordable, gas was $1.35 a gallon, food wasn't over $100 a week per person.

baby_BLYTHE's picture

This has got to stop.

The banks have had more than enough time to recapitalize. Enough is enough.
Time to put back into place Glass Steagall, unwind the derivatives and let the banks stand on their own.

None of this is helping the average American nor the overall economy. One man's thesis is destroying an entire nation and the livelihoods of future generations.

SheepDog-One's picture

Exactly, theyre just playing with themselves at this point. Time to let the banks flop and those responsible for this disaster be held accountable. But of course WW3 will happen instead.

Archimedes's picture

Rumor circulating that the EU is planning on suspending Mark to Market accounting for the banks!

DefiantSurf's picture

That's hilarious! I was under the impression they were already marked to skittles...

tickhound's picture



Soma soma soma soma soma sham-eleon,

You come and go, You come and go-oh oh.

Life is so easy when everyone lives the dream,

That golden dream, Gold beats the gree-e-e-een.


TruthInSunshine's picture

Love ya' Tylers & Zero Hedge, but The Bernank won't be able to sustain 55 billion/month in purchases from existing balance sheet twist, and he'll need an explicit go ahead (by decree and appropriation) by the Congress, which isn't going to happen.

Selling 420 billion worth of shorter duration bonds, even if the Fed did this, IS NOT adding additional money into the system, and it will have hefty consequences for the curve, and like you mentioned, who's the greatest fool of all (who will purchase short maturity USTs at this point)?

Do you mean to tell me that the Fed can "quickly dump" 1.5 to 4 yr USTs - "all of their holdings," while new USTs of the same maturity are issued by Treasury, without some major issues? Can you say "oversupply?"

The great paradox in this whole thesis is that only with The Bernank monetizing 65% to 70% of U.S. deficit spending for some 22 odd months were UST yields driven down (Paul Krugman, do you understand this? Do you understand that the U.S. treasury note market is manipulated, and not a free market price setting mechanism?).

Maybe The Bernank can both sell and buy those 420 billion worth of shorter maturity USTs (/sarc/).

Just a SWAG on my part, but I'll be surprised if The Bernank will be able to mustereven 15 billion in accretive buying monthly.

Finally, anyone who thinks 'twist' of any kind is interjecting new money for the PDs to play with (pumping stocks or any other risk assets) is not seeing life through a lens of reality, as 'twist' is NOT adding any liquidity or giving additional monies to prime risk asset trades - BTFD sheeple (and the big boys won't be doing the dip buying, not to mention that any real dip would mean equity markets about 40% lower than where they are now) are going to get sheered until their skin bleeds and they get sepsis.


p.s. - Just as I have stated previously, Kocherlakota wasn't backtracking on QE3 at the last FOMC meeting; he isn't inclined to go along later this month, either. His remarks only had to do with ZIRP policy. Kocherlakota is making it clear now, since so many misinterpreted his statements:

09-06 13:41: Fed's Kocherlakota says easing monetary policy in August was...

Fed's Kocherlakota says easing monetary policy in August was inconsistent with Fed's inflation goals
ThirdCoastSurfer's picture

Maybe The Bernank can both sell and buy those 420 billion worth of shorter maturity USTs (/sarc/).


A good Bank, bad Bernank scenerio? 

FreedomGuy's picture

"Maybe The Bernank can both sell and buy those 420 billion worth of shorter maturity USTs (/sarc/)."

Does this mean Bernanke is 420 friendly? Policy would suggest so.

Nascent_Variable's picture

Correct me if I'm wrong, but wasn't Operation Twist 1 generally considered to be a failure?  If the markets of the early 60s couldn't do anything with it, what makes the Fed think that today's utterly broken market can make it work?

Long hype.  Short results.

gwar5's picture

Thanks for flash, ZH, hot off the presses! 


I also think the Fed will do something in September. Obama's polls are dragging again and hitting new lows since QE2 stopped. SOMA, and the sooner he better as far as he's concerned.


RobotTrader's picture

Another SocGen "Expert"

Soon to be out of a job when her company fails.

By the way, what's up with these freaking REIT stocks?

SPG has hardly corrected.  Shopping centers must be the new "safe haven".  Enough to drive a man to the poor house shorting these stocks.

Ruffcut's picture

Let's get some MOMO from the POMO.

Just like ROBO, this country is a fucking JOKO.

kill switch's picture


Yea, and King Kong plays Ping Pong in Hong Kong with his Ding Dong!!


While doing the Bernanke twist..


pcrs's picture

selling these short term bonds would require a pancik belonging to a terrorist attack

RobotTrader's picture

LOW, SBUX, WFMI, JWN, and the usual suspects are now green.

chancee's picture

So why wouldn't stocks go up again?  Last time the banks used all the free money they made on the spread and bought stocks so they went up.  Same things will be happening again... It doesn't really matter where or what the Fed is buying along the curve... as long as the banks are somewhere in the equation.  It's all just a front for the Fed to funnel free money to the banks under the instruction to buy stocks again.

TruthInSunshine's picture

Because this isn't adding money to the PD pool.

Even if one assumes even a portion of this analysis is correct, it's akin to selling your 2003 Honda Accord with 85,000 miles so that you can buy a comparably equipped 2003 Toyota Camry with 85,000 miles.

There is no more POMO in the sense of QE1 or QE2.

There is no spoon.

SheepDog-One's picture

Its all BS, there are no more greater fools, no matter how much the FED wants a do-over. 

John McCloy's picture

So laughable that the 10 years is much lower than where it was where it was when the bond market was indicating a depression in 2008 and how disconnected the stock market is from the bond market. So which one is lying? I think we all know the answer to that. Amazing how volumeless stock markets are not seen for the charade that they are. 

scatterbrains's picture

I'd luv to see TD's spread trade (2/10/30 vs. /es  on a 5 year weekly basis if possible... wondering how much air is being pumped up under the stock market longer term.

SheepDog-One's picture

Both stocks and bonds are now a total lets do some more of the same nonsense and make them go up! The time is here now where intervention no matter how much means nothing. 'Always a bigger fool somewhere'...yea right Im not betting on it.

chancee's picture

So why wouldn't stocks go up again?  Last time the banks used all the free money they made on the spread and bought stocks so they went up.  Same things will be happening again... It doesn't really matter where or what the Fed is buying along the curve... as long as the banks are somewhere in the equation.  It's all just a front for the Fed to funnel free money to the banks under the instruction to buy stocks again.

Howard_Beale's picture

Your assumption that the remaining primary dealers have gargantuan equity prop desks is faulty. The stocks have to get laid off to the hedgies, pension funds, etc. It's not like it's a buy and hold game for them.

And look where stocks are now after QE2 ended. Right where they started.