Jon Hilsenrath Is Wrong: Why Operation Twist Will Not Be Extended

Tyler Durden's picture

Yesterday, Goldman's Jan Hatzius, piggybacking on what has now become a prevalent belief among Wall Street economists following a "leak" from the WSJ's Jon Hilsenrath, predicted that the FOMC minutes would hint at more easing, in the form of "sterilized" interventions, or in other words, an extension of Operation Twist. There is, however, one problem with this analysis. It is total BS, for a simple reason that for every bond on the long end that the Fed buys (and it has bought a whopping 91% of the 20-30 year gross Treasury issuance), it has to sell one in the 3 Month - 3 Year maturity interval. And therein lies the rub. As Bank of America shows below, at the end of Twist in June there will be just 2 months worth of Treasurys available for sale. What could fix this? Well, instead of ZIRP until 2014, Bernanke could say the Fed would keep rates at zero until 2016 or even 2018, and proceed to sell all Fed holdings in the 3 month - 5 year or 3 month - 7 year intervals. This however, would make the entire bond curve an epic farce, shifting the belly to beyond the 10 year point, and in the process blowing up the MBS market due to total collapse of traditional convexity heding strategies. Which we don't think is likely unless the world is coming to an end. In other words, anyone hoping that Twist will be extended, is wrong, and in turn it means that any real option for the Fed's NEW QE will be the outright monetization (aka LSAP) of either USTs or MBS, ala QE1 and QE2.

BofA explains further:

Extending Twist is a limited option, as the Fed will have only about $175 bn of short-dated Treasuries (3 months to 3 years) in its SOMA portfolio on June 30. That would allow two to perhaps three months of further twisting at the current pace — i.e., into September. That does buy some time, but the Bernanke Fed has not been one to go for half-measures or small steps since the crisis began. If the outlook warrants more easing, we still see QE3 as the most likely tool chosen.

Math - it's fundamental.

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Stoploss's picture

WHEN can we put that little cocksucker Hilsenrath in jail???

strannick's picture

The pigs ear has been twisted all it can. The pig now needs to be stuck in the butt again with the QE pitchfork if the market is to squeal higher

Buck Johnson's picture

The market is down today because they believe no QE but if the market continues down they will have to do something along the lines of a QE and they don't want too.

SheepDog-One's picture

So now we're not going to number QE's and like Apple just call it 'New QE'?

You conclude more outright monetization is coming, well has anyone figured out at what point monetization is done? Could be already done? My point is you dont just monetize the debt in perpetuity, at some point the debt is monetized, and I suspect theyre pretty much done. But hey go ahead and 'NEW QE', I'd like to see what happens when gas shoots over $7, hey go for it.

SheepDog-One's picture

I got a tear reading it, boo hoo.

HarryM's picture

11:35 - will the Invisible Hand appear today?

SheepDog-One's picture

Well they keep talking about needing a 'crisis', why not just go with it now and let stocks fall and declare it their 'crisis' and perform 'New QE'? No time like the present Ben.

HelluvaEngineer's picture

Heck, people are already trying to front-run it

Soul Train's picture

so true, lots of frontrunning and others just buying at the 200sma. If their expectations aren't met, look out!

earnyermoney's picture

Obama giving a speech today? If not, you'll see the hand that moves his lips move the market.

Vince Clortho's picture

There is only one man who can save the financial system now. 

He has saved the financial world many times.

He did it again last month.

In his fortress of solitude BernankeMan can hear the cries for help.

[... to be continued]


Carl Spackler's picture

Could easily say...

US Addicts - Herion addicts suffer withdrawal on waning hopes of Fed pushing

schoolsout's picture

What happens when Pensions, States, etc. can't meet obligations?  Do you think people will be happy that gas is only $1-2?

surf0766's picture

I'll be hapy then. Redo the contacts.. Better yet follow the GM model and cancel all public union contracts for starters.

schoolsout's picture

I just have that feeling that the people that rely on the gov't for many things will be out in the streets taking whatever they see/want.  It's obvious the people can't connect the dots between the QEx's and rising commodity costs, but they can connect the dots to the gov't not providing them with their monthly dose of freebies...


You pickin' up what I'm puttin' down?

LawsofPhysics's picture

Better yet, what happens when the pensioners are wiped out and gas stays high.  Why would a commodity sold around the world suddenly drop simply because a few Americans went broke?  The BRICs have plenty of "money" to spend on this commodity and (unlik America) their demand is growing. $1-2 gas, right, Michelle Bachman is that you?

schoolsout's picture

Why did the price of gas drop so much back in '08-'09?  Liquidity dried up...people couldn't leverage what wasn't there.  The same thing has very good chance of occurring again should the CB's of the world choose to stop "printing."

I think that is what we need, by the way.  I just don't see the Central Banks who have kept the debt/credit bubbles going for decades as coming to the same conclusion.

LawsofPhysics's picture

Looking at the charts I don't see gas going anywhere near $1.00 or $2.00. back then.  You said specifically $1.00-2.00.  Ain't going to happen.  Numerous examples of inflation occuring regardless of "liquidity" or "demand" (look at every currency collapse).

Yes, you are right the CBs will fight reality to the death, they always have.

schoolsout's picture

Gas was below $2 in 2008...just before the flood of liquidity started from the Fed/Gov

LawsofPhysics's picture

I see it below $2.00 before the 2001 crash, not the 2008 crash.

schoolsout's picture


Nat'l Avg in the $1.6x was lower here in SC


Then the bailouts/QE/whatever was announced...and prices went up as liquidity flooded the markets once again.

LawsofPhysics's picture

SC, well that explains it. Just another example of rural areas being taxed in numerous ways to bailout the northeast and west coast.  Unless you see a big raise in your future, I'd leave.  This will continue and SC is not well represented among the thieves running the show.

schoolsout's picture

What are you talking about?  The national average was in the $1.6x range...SC was lower.  You were claiming there was no sub-$2 gas after 2001.



LawsofPhysics's picture

Not in San Diego.  Again, I see more "rob from the rural folks to bail out the cities" moving forward.

surf0766's picture

I got ya. It is way past time people stop putting their well being on someone elses' shoulders.  The last time I saw $1.00 gas or close to it was on the way toe Cape May NJ the day we started in Afghanistan. It was 77 cents that morning.



lotsoffun's picture

the 'people' can't do basic math, read or write or speak correct english.  anybody posting on this blog is really well into the top 10% if not 1 or 2 %

it's easy to lose track of how little people really know, or care.  i don't know farmland areas, but i know big cities and in big cities education is how to sign up

for this and that, and that is the kind of education people give each other.  they don't explain 'you know pal, the national debt is so large, that, in order not

to bankrupt the nation, they might start taking away our benefits, and inflation may sky rocket and we won't have anything to sustain us, so maybe

we should start looking for a job'.

doesn't exist.


SheepDog-One's picture

No I dont think people will be happy with what theyre going to do next at all, seizing all their pensions and 401K's will make mom and pops bummed out.

 $1-$2 gas? I dont know about that, what would be causing all time lows in oil and gas pricing? $1 gas?

schoolsout's picture

An economy that can only stand on the Fed's legs...when they pull the rug, the money is gone and we go back to 2008


I guess...Hell, I don't know.  I just don't see them not providing liquidity/more QE in the future.

SheepDog-One's picture

Yep, and its telling the Wall St media keeps wringing their hands over why retail isnt showing up to buy like mad. What they really need to do is pass off their money printing top here, not print more, but they never considered that theyve bankrupted everyone and there is no one to come in and buy.

LawsofPhysics's picture

FYI- ZIRP is free money or QE by any other name.  Unfortunately those zero-interest loans are not for you.

SheepDog-One's picture

Right, and now banks are sitting on so much 0% free money in so many trillions no one can even keep count, and wondering why 'credit' is not catching up with 'costs'? And why 'retail' is not swarming back in to panic buy the top of their market pump here? Laughable.

Dr. No's picture

The Treasury could come the rescue by selling a bunch of short term to make up the difference?  This would require more government spending but I am confident they can determine projects to spend it on.

Edit: but this would require the FED to increase money supply significantly.  which I dont think they will do.

Cursive's picture

Scylla, meet Charybdis.

Dumpster Fire's picture

two to perhaps three months of further twisting at the current pace — i.e., into September.


Gonna need something else.  November is the operative month here.

SheepDog-One's picture

Maybe, maybe not. Could be theyre done with ObaMao and want a new puppet to call the bad guy for whats coming next.

Dr. Engali's picture

They're not done with him yet. The rest of the crowd is just a side show.

SheepDog-One's picture

I dont know what theyre going to do, but I suspect the 'conventional wisdom' conclusions on it all will prove to be totaly wrong.

Shizzmoney's picture

 Bernanke could say the Fed would keep rates at zero until 2016 or even 2018

They can't raise interest rates.  Otherwise the ponzi gets exposed.

Buzzworthy's picture

No need to call it QE by any number.  The objective is obfuscation, right?  Considering the Fed is already in the process of monetizing 50%-60% of debt issuance every auction without calling it anything why is a name necessary?

SheepDog-One's picture

Its what fascism looks like.

Jason T's picture

Woud love to see them lose control and the backlash of this deal with the devil money printing.

Nathan Hale's picture

Looking at the eurodollar STIR market, it seems as if operation twist is in effect as we speak. massive  flattening going on between 2013 and 2014. they are bungholing everyone that positioned on the fed minutes yesterday!

Dr. Engali's picture

Damn the DAX got creamed today. All that money printing wiped out in a flash.

SheepDog-One's picture

Aaand, its gone. Gone? Yep, gone.

Well I guess it shows easy free money come, easy free money go.

Dr. Engali's picture

Just like clock work. Europe closes and the robots start churning the markets higher. Europe needs better robots.

SheepDog-One's picture

Working hard to regain market losses here, seems to me they both need a 'crisis' and terrified of letting a crisis appear anywhere, or even letting -100 DOW points stick. 

Heiman Van Rockerchild's picture

That is exactly what they have been doing and will continue to do. All through massive fraud, lies, deceit, propaganda and manipulation.

Shining The Light of Truth on The IRS with Former CID Agent Joe Banister

Constitution Class


Son of Loki's picture

Murtha Airport, brought to you by American taxpayers


the Fed will need to print forever to fund this and other similar pork projects...

Sutton's picture

Ben broke on through to the other side.  And there is no way back.  He will end up owning every US Bond out there, and  at all time highs.

He can not waver, even just a minute.