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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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Tue, 09/06/2011 - 13:42 | 1638775 BaBaBouy
BaBaBouy's picture

PRINT Bitchezz ...


And Gold $5K Next Stop.

Tue, 09/06/2011 - 13:43 | 1638794 The They
The They's picture

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

Tue, 09/06/2011 - 14:20 | 1638950 TruthInSunshine
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.

Tue, 09/06/2011 - 14:23 | 1638964 SheepDog-One
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.

Tue, 09/06/2011 - 14:39 | 1639022 kengland
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...



Tue, 09/06/2011 - 14:56 | 1639101 FreedomGuy
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.

Tue, 09/06/2011 - 16:34 | 1639439 Thomas
Thomas's picture

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

Tue, 09/06/2011 - 19:54 | 1640112 sun tzu
sun tzu's picture

Depends on how far they push it

Tue, 09/06/2011 - 14:34 | 1638994 DefiantSurf
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"


Tue, 09/06/2011 - 15:53 | 1639291 Withdrawn Sanction
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.

Tue, 09/06/2011 - 16:36 | 1639448 Thomas
Thomas's picture


Wed, 09/07/2011 - 04:05 | 1641222 Anonymouse
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.

Tue, 09/06/2011 - 14:36 | 1639013 Todd Horlbeck
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.







Tue, 09/06/2011 - 15:04 | 1639140 FreedomGuy
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.

Tue, 09/06/2011 - 15:34 | 1639249 narnia
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.

Tue, 09/06/2011 - 16:38 | 1639454 Thomas
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.

Tue, 09/06/2011 - 17:21 | 1639599 FreedomGuy
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..

Wed, 09/07/2011 - 04:08 | 1641228 Anonymouse
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.

Tue, 09/06/2011 - 13:37 | 1638776 kengland
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?

Tue, 09/06/2011 - 15:06 | 1639145 FreedomGuy
FreedomGuy's picture

Good question...and at what price?

Tue, 09/06/2011 - 13:37 | 1638777 bgilliam83
bgilliam83's picture

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

Tue, 09/06/2011 - 13:52 | 1638818 The They
The They's picture

Please expand and explain.  Until then -1.

Tue, 09/06/2011 - 13:53 | 1638824 kito
kito's picture

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



Tue, 09/06/2011 - 13:38 | 1638778 djsmps
djsmps's picture

That should create 2 million jobs.

Tue, 09/06/2011 - 13:43 | 1638793 urbanelf
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.

Tue, 09/06/2011 - 13:57 | 1638837 pods
pods's picture

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


Tue, 09/06/2011 - 13:41 | 1638789 adr
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.

Tue, 09/06/2011 - 13:42 | 1638790 baby_BLYTHE
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.

Tue, 09/06/2011 - 13:57 | 1638836 SheepDog-One
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.

Tue, 09/06/2011 - 14:09 | 1638886 Archimedes
Archimedes's picture

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

Tue, 09/06/2011 - 14:37 | 1639017 DefiantSurf
DefiantSurf's picture

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

Tue, 09/06/2011 - 13:43 | 1638798 tickhound
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.


Tue, 09/06/2011 - 14:17 | 1638799 TruthInSunshine
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
Tue, 09/06/2011 - 14:22 | 1638956 ThirdCoastSurfer
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? 

Tue, 09/06/2011 - 15:11 | 1639172 FreedomGuy
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.

Tue, 09/06/2011 - 16:17 | 1639385 Nascent_Variable
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.

Tue, 09/06/2011 - 13:44 | 1638801 gwar5
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.


Tue, 09/06/2011 - 13:44 | 1638802 RobotTrader
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.

Tue, 09/06/2011 - 14:02 | 1638853 Ruffcut
Ruffcut's picture

Let's get some MOMO from the POMO.

Just like ROBO, this country is a fucking JOKO.

Tue, 09/06/2011 - 15:24 | 1639208 kill switch
kill switch's picture


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


While doing the Bernanke twist..


Tue, 09/06/2011 - 13:51 | 1638815 pcrs
pcrs's picture

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

Tue, 09/06/2011 - 13:52 | 1638820 RobotTrader
RobotTrader's picture

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

Tue, 09/06/2011 - 13:55 | 1638829 chancee
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.

Tue, 09/06/2011 - 14:05 | 1638862 TruthInSunshine
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.

Tue, 09/06/2011 - 14:08 | 1638881 SheepDog-One
SheepDog-One's picture

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

Tue, 09/06/2011 - 13:55 | 1638830 John McCloy
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. 

Tue, 09/06/2011 - 14:05 | 1638855 scatterbrains
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.

Tue, 09/06/2011 - 14:06 | 1638868 SheepDog-One
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.

Tue, 09/06/2011 - 13:55 | 1638831 chancee
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.

Tue, 09/06/2011 - 15:43 | 1639265 Howard_Beale
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.

Tue, 09/06/2011 - 14:01 | 1638834 firefighter302
firefighter302's picture


Tue, 09/06/2011 - 14:05 | 1638846 plocequ1
plocequ1's picture

But, But, But Tommy,  i thought you said that im ok Spider

Tue, 09/06/2011 - 14:07 | 1638872 SheepDog-One
SheepDog-One's picture

No youre not OK Spider now dance me a little jig!

Tue, 09/06/2011 - 23:00 | 1640687 Alpha Monkey
Alpha Monkey's picture

Love that movie :)

Tue, 09/06/2011 - 14:04 | 1638856 Elooie
Elooie's picture

I have little doubt the government is going to try and refinance at whatever duration the Fed goes after. Get ready to see a bunch of 10,15, 20, and 30 year refinacing once the purchasing starts happening.

Fed will bring down yields then the treasury will start issuing. I wish I could manipulate my borrowing costs this way.

Tue, 09/06/2011 - 14:08 | 1638877 Archimedes
Archimedes's picture

Wait a minute,

Doesn't the US have nearly 4 Trillion is short term debt coming due in the next couple of years? If the Fed is selling short term who is going to buy all of this short tem debt and at what price? Is the US can't roll its short term debt doesn't the US just implode?

I fail to see exactly what this move accomplishes. But then again..I don't have a PHD in Economics.

Tue, 09/06/2011 - 14:11 | 1638895 TruthInSunshine
TruthInSunshine's picture

You're a smart person. This analysis is rubbish.

I'm surprised more people haven't concluded that 'twist' is not QE by another name (not even close).

While this analysis is the (anti)intellectual handiwork of SocGen, ZH is claiming that twist is all about the steepener, but affecting the UST yield curve has nothing to do with adding liquidity.

Tue, 09/06/2011 - 21:49 | 1640473 ZeroPower
ZeroPower's picture

This is no longer a liquidity crisis. It was when Lehman blew up and lending froze - but were not seeing that now. Were literally seeing EU banks becoming less solvent by the day as their assets are constantly eroding due to each other's shit scattered on each other's banking books (i.e. not held for short term).

Tue, 09/06/2011 - 14:11 | 1638897 SheepDog-One
SheepDog-One's picture

The FED apparently still believes theres a line of greater fools out there who are also total idiots to buy their lemon bonds.

Tue, 09/06/2011 - 14:50 | 1639067 LawsofPhysics
LawsofPhysics's picture

Exactly, something fishy going on here, but then again, how do derivatives fit into all this?  Seems like many inconsistencies end with this black hole.  Any thoughts?  Debt being disappeared?  Something just doesn't add up.

Tue, 09/06/2011 - 14:09 | 1638887 SheepDog-One
SheepDog-One's picture

Im just waiting for the new HG TV show 'Flip That Old Bond'.

Tue, 09/06/2011 - 14:12 | 1638906 Boilermaker
Boilermaker's picture

Can someone, again, please tell me why keeping the equities markets at a certain level is so fucking important?

Tue, 09/06/2011 - 14:15 | 1638919 SheepDog-One
SheepDog-One's picture

Apparently has to do with psycology of the 401K sheeple, if 11K then all is well, or something.

Tue, 09/06/2011 - 14:36 | 1639014 Peak Everything
Peak Everything's picture

Correct me if I am wrong but I think banks include the market value of their equity in assets used to calculate required reserves. So if stocks tank, banks go bankrupt.

Tue, 09/06/2011 - 14:51 | 1639075 LawsofPhysics
LawsofPhysics's picture

That's it.  At this point either the bank, or the Federal Reserve, or the taxpayer goes bankrupt.  Guess which one it is going to be?

Tue, 09/06/2011 - 16:15 | 1639375 Boilermaker
Boilermaker's picture

then wouldn't using a POMO to levitate the entire market be the most inefficient way to do it? 

Tue, 09/06/2011 - 14:14 | 1638915 AustrianEconomist
AustrianEconomist's picture

The end of the great debt experiment is nearing and everything is pointing towards a big credit crash coming up. The world’s monetary system needs to be backed by gold in order to move forward with a sound financial system that does not allow banks create money out of thin air. Money should not be based on debt, but on sound intrinsic value.

Check out the latest from the Capital Research Institute (CRI): The Debt End Game

Tue, 09/06/2011 - 14:55 | 1639093 firefighter302
firefighter302's picture

Thanks Austrian economist, I needed that breath of wisdom.

Seems to me, any "money" which can be "man-made" and is unbacked by a finite fungible underlying asset is destined to fail due to debt. The nature of government (and not just from the left) to increase in size and scope makes a massive debt of unbacked money almost a certainty.

And here we are.

Tue, 09/06/2011 - 14:16 | 1638924 blunderdog
blunderdog's picture

I guess Aneta listens to Jim Rickards, huh?

Tue, 09/06/2011 - 14:15 | 1638925 Quadlet
Quadlet's picture

Please explain.  By selling ST USTs, you drive UP yeilds and buying LT USTs drives yeilds DOWN.  This compresses the 2-10 spread.  This hurts the banks even more.  If anything, this report has it backwards.

The Fed could buy ST and sell LT, increasing the spread, aiding banks.  I don't think Twist is going to happen, but this is how I'd do it.

Incidentally, the shorter maturity of UST lowers the Govt's borrowing costs, reducing the deficit with NO cuts.  /sarc Magic! /sarc

Tue, 09/06/2011 - 14:47 | 1639061 blunderdog
blunderdog's picture

It's rollover, not selling.  When the short stuff matures, you buy longer stuff.  Keeping yields low is the objective.

Tue, 09/06/2011 - 16:22 | 1639399 Quadlet
Quadlet's picture

I believe Operation Twist is a red herring.  Anyone who has thought about it the way they are presenting it knows that it will not achieve the results they want.  Ben B. is stalling. For what, I dont' know.

Wed, 09/07/2011 - 01:51 | 1641069 StychoKiller
StychoKiller's picture

Perhaps he's waiting for the Vogons to emerge from hyper-space! :>D

Tue, 09/06/2011 - 14:21 | 1638953 SheepDog-One
SheepDog-One's picture

'Hmmm lets see...we're screwed, so lets try some more of this 'monetizing our own debt and refinancing it' stuff and see if that works by the next meeting'. 

Bunch of fuktards! Oh BTW anyone noticing the decidedly frosty QE3 air sweeping across the country? I guess another FOMC 'No QE we're good for now' will again just be interpreted as positive news....or will people start realizing that no outright QE3 gift is coming?

Tue, 09/06/2011 - 14:37 | 1639018 chancee
chancee's picture

You're looking at the wrong 'spread'.  The banks will make their money on the bid/ask apread.  The Fed will buy the higher duration from the banks and let them rip them off by paying way too much.  Just like last time.

Tue, 09/06/2011 - 14:37 | 1639019 chancee
chancee's picture

You're looking at the wrong 'spread'.  The banks will make their money on the bid/ask apread.  The Fed will buy the higher duration from the banks and let them rip them off by paying way too much.  Just like last time.

Tue, 09/06/2011 - 14:40 | 1639030 Peak Everything
Peak Everything's picture

This article makes no sense. The only thing that makes sense to me about twist is the government trying to keep their deficit financing costs low.

Tue, 09/06/2011 - 14:47 | 1639060 Big Ben
Big Ben's picture

Right! Let's just push those long term rates lower. They are already at generational lows now and negative in real terms. But they need to be lower dammit! The Treasury bubble isn't big enough.

To me, this is as if the Fed were buying the NASDAQ at a level of 5000. It is just suckering more people into a massive bubble. Negative real interest rates just encourage misallocation of economic resources and don't lead to anything good.

Operation Twist would also tend to lead to a leveling of the yield curve. An inverted yield curve is a traditional predictor of a recession. But the yield curve cannot invert currently because short-term rates are pegged at near-zero.

Tue, 09/06/2011 - 15:05 | 1639139 DefiantSurf
DefiantSurf's picture


 At the end of the day the US economy has contracted by 20%, additionally even the employed have strongly reduced consumption, inflation, deflation doesn't matter as the fiat economy has passed the event horizon and all efforts are doing nothing but postponing the inevitable crash. The loss of faith (the only thing that holds this house of cards up) is declining at an unprecedented rate as we swirl around the bowl pontificating about whether its PIIGS or Euros or TBills first. 



Tue, 09/06/2011 - 15:11 | 1639169 duckhook
duckhook's picture

By increasing their duration risk out to  30 years,what is going to happen when the Fed has to reverse out of their positions .it is not like bills where they just mature.

Lower long term rates will not help the economy at all.Few people get 30 year mortagages.Companies are flush with cash.Savers will get even lower reates of return.

Among the unintended consequences of this move will be a forced recalculation of future returns for pension funds.This will place even more pressure on states and localities and force more and more of them in bankruptcy or the equivalent.

Tue, 09/06/2011 - 15:19 | 1639196 DefiantSurf
DefiantSurf's picture

 There is no way out, this is simply a bread and circus answer to appease the the time the public figures out they've been had, it will be too late.


Tue, 09/06/2011 - 15:26 | 1639223 bbq on whitehou...
bbq on whitehouse lawn's picture

So let me get this logic strait.

The Fed Sells 6month-7 year bonds only to buy them back on the secondary markets, while issueing brand new 100 year bonds that it also buys.

Please stop the ride im going to throw up.

Who said that Twist is not printing? If the Fed buys that debt back its printing, it doesn't matter if its right away or 1-10years down the road its still printing.

Printing is inflation and 40$ a gallon milk and gas here we come.

God save you because the Fed wont.

Tue, 09/06/2011 - 15:44 | 1639253 TruthInSunshine
TruthInSunshine's picture

First, the Federal Reserve doesn't issue bonds; the Treasury does.

Second, if the Federal Reserve sells 420 billion worth of its current holdings of 1.5 yr - 4 yr to maturity tnotes, in order to raise the money to buy 420 billion worth of longer maturity tnotes, how is this "printing money?" There is no additional fiat being created. It's merely being reallocated into a different term UST class.

AGAIN, selling 420 billion of its tnotes reduces its balance sheet, and buying 420 billion of longer maturity dated treasuries replaces that hole. This action does not add to the Fed's balance sheet.

No one can dispute that the goal of 'twist' is to attempt to lower longer yields, even though it's an idiotic policy as interest rates are not even a blip on the radar screen of the serious structural crises underminining our economy.

Tue, 09/06/2011 - 15:48 | 1639278 buzzsaw99
buzzsaw99's picture

another multi-billion dollar gift to the PDs. They are already front-running the twist-trade. Later they will buy cheaper T-bills with a duration that exactly matches the zirp guarantee.


1) steal underwear

2) ?

3) profit!

Tue, 09/06/2011 - 16:38 | 1639456 bigelkhorn
bigelkhorn's picture

Fed has its own limitation. It cannot pour money to save other banks. Banks on the other hands are getting a riskier desitnations for us. :(

I prefer to follow the consultants before making any investment decisions. Hence I follow, their predictions are 100% accurate so far. am just loving it.

Tue, 09/06/2011 - 17:45 | 1639673 foxman
foxman's picture

check out the action in TLT over the last month.  Market is betting that this is game on.

Wed, 09/07/2011 - 20:25 | 1644130 LarryKudlow
LarryKudlow's picture

The bubba from Texas is speaking. You may want to apply for a job at Taco Bell in Texas.

Wed, 09/07/2011 - 20:25 | 1644131 LarryKudlow
LarryKudlow's picture

The bubba from Texas is speaking. You may want to apply for a job at Taco Bell in Texas.

Do NOT follow this link or you will be banned from the site!