Operation Twist Is Coming To An End: A Preview Of The Market Response

Tyler Durden's picture

As macro data trends deteriorate and Dudley demurs, it is becoming increasingly clear that the risks for the US equity market are skewed to the downside as we head towards the end of Operation Twist (and seasonal factors subside). The Fed's 'upgrade' from modest to moderate growth certainly spooked Gold and Treasuries and saw small caps notably underperform but given historical precedence, if Operation Twist ends without a new program beginning, investors will likely expect a drop in equities (broadly) of 8-10% (which coincides with the QE1 and QE2 ends as well as the 1983, 1994, and 2003 normalizations in policy). Reiterating our recent theme, in order to avoid the end of Operation Twist, the Fed's economic outlook would need to deteriorate - which itself is a scenario likely to result in falling stock prices and just as the cause of a 'crash' in PCE towards the end of QE1 and QE2 was a function of higher inflation, we have the current spike in energy prices to ensure this time is no different.


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LookingWithAmazement's picture

Gold and silver will lower as well.

Surly Bear's picture

I do not believe they will allow the market to determine a yield curve much less alow it to steepen. They will change the name, implement a new directive, or stick their fat fingers into something else to keep the ball rolling.

The Big Ching-aso's picture



The unthinkable.   What if Bernanke cheated on his SAT?

WhiteNight123129's picture

If you have great memory but no understanding I guess you can have a very high SAT.

TrafficNotHere's picture

Question, does anyone know when "operation twist" is finalizing? IE, date / date range?

Jack Napier's picture

Search engines reveal that it will be over on June 12. Right about when Jan Hatzius is calling for QE3. If they don't do QE3 then expect deflation to set in. They'll probably let the deflation scare happen for a minute so that people won't come with the torches and pitchforks when they do begin QE3.

Or maybe they'll start issuing negative yield bonds. Then the QE sky is the limit and no formal program or declaration is necessary.

Excursionist's picture

The Fed's intervention has comprised selling short-dated maturities and buying long-dated maturities.  No money printed.  That said, a second-derivative effect has been retail and institutional guys getting pushed into riskier asset classes (e.g., AT&T common stock effectively becoming a bond), since real returns of 20+ year USTs have been somewhere between 'dick' and laughable.

Question is whether these investors will come home and cause risk assets to correct once the long-end of the curve moves up.  Using TBT as a simple indicator shows this hasn't happened yet, but the upward trend in long-term yields seems to be only beginning..  I'd keep my eye on something like TBT instead of some arbitrary Fed date that the (alleged) smart money will price in long before you.

ATM's picture

If the fed sells short dated securities at less tham market price and buys long dated at above market price I call that MONEY PRINTING.




Pool Shark's picture



Interesting; if you remove the light blue regions in that chart, and piece the white regions back together, you have the S&P right around 600.


Carl Spackler's picture

Correct mayhem.

It's all about relativity.

LookingWithAmazement's picture

Not sure. If a new run on consumer goods arises, their prices will go higher, but PMs lower: not the same purchasing power.

mayhem_korner's picture



Give me a time horizon more than the half-life of any manipulation, and the purchasing power will hold.

LawsofPhysics's picture

I'd argue the same for any physical asset.  Especially ones that can not be easily stolen and generate revenue, like my rental units or arable land that isn't currently being planted.  Funny how black markets and local favors can still be "purchased" with almost anything.  The only way a corrupt system ends is if everyone stops playing and then you would be fucking suprised exactly what things have "purchasing power".  What kitco says is true, so long as everyone is comfortable with the whole world becoming a cross between India and China.  Corruption in these countries is staggering and more than half of all transactions occur "off the books".  Fine, fucking bring it.

ATM's picture

What consumer goods have the durability of gold?

When the rush into everything real happens people will still demand something as a durable store of wealth. Gold has proven to be that perfect asset since the dawn of money. Gold is the perfect real money. 

When the general population across the globe realizes that fiat is a scam because every central bank is printing to the bottom then the rush to gold will happen with certainty. People aren't going to rush to digital money. They aren't going to accept paper promises any longer. It will be a something real.

kito's picture

@looking, both will certainly drift lower at some point, and we will not be seeing any new highs in either metal until earliest next year, as ben hasnt printed since mid last year, and wont print again until earliest next year......and when that acute deleveraging event happens, and all of those digital dollars around the world vanish, all of bens horses and all of bens men wont put pms back together again......................physical dollars will be hard to come by.....stock up now............your home depot and your walmart will not be accepting eagles and buffalos to procure whats on their shelves, which wont last very long anyway......

mayhem_korner's picture

we will not be seeing any new highs in either metal until earliest next year, as ben hasnt printed since mid last year, and wont print again until earliest next year

You don't think the market can respond to all those fresh new digital Euros floating around?  Is it only US fiat that counts?

kito's picture

for pms priced in dollars, yes........dont know about you, but the bulk of my purchasing power lies within the contiguous 48 states........

mayhem_korner's picture



Oh.  That makes sense.  Good thing that gold is not priced in other currencies...or that if it was, the dollar-denominated price would be immune to that.


Lord Koos's picture

Globalism ring a bell?

Mr Lennon Hendrix's picture

When QE 2 ended gold shot up like a rocket.  What type of information do you clowns use to judge market reatcions?  Animal balloons?  When currency moves out of one asset class it moves into another one.  If cash runs out of stocks, everyone still thinks it will go to the dollar....like this is '87 or something. 

40 years into the Global Fiat Ponzi and people still do not understand your currency is worth nothing!

kito's picture

gold shot its load about a month or so after qe2 ended....and hasnt been back since....people on hopium thought qe3 was up next....its wasnt............pretty straightforward stuff......

mayhem_korner's picture



The people on hopium aren't the ones making the market in physical gold.  Eventually you will learn this, but hopefully not too late.

The Big Ching-aso's picture



Speaking of shooting its load.   Get your hand off that thing.

LawsofPhysics's picture

ZIRP is fucking QE idiot!!  There is a very real cost for creating capital and not adding any real value to the system.  Seems like people have not learned the lesson of Japan.  Fine with me, I have many physcial assets, many are generating revenue, so fuck it.  The paper fucks will learn the hard way, same as it ever was.

kito's picture

zirp is not qe, and again, for the 10th time lawsphysics, when you see gold break through its high from last year only if qe3 is implemented, you will understand the difference....

Jack Napier's picture

ZIRP is not QE in that it is not buying treasuries outright, but it is still expanding the money supply through more of a water drip method than a full on flood, because as long as banks can loan money for a higher intrest rate than they have to borrow at, and as long as all these loans use money conjured into existence for the purpose of the loan, the net result is the same.

Your crystal ball is made out of meth.

slewie the pi-rat's picture

twist is QE, kito, not "zirp" as you "correctly" state

agreed: twist in its present known and reported form is not funding the debt with newly "printed" FRNs;  yet it is still QE, by definition, as far as i know from looking stuff up

thxz for the link to the article about israel;  more gobbleeygook to pretend that last week's gobbleygook has now been "fine tuned" around "iran"

J 457's picture

Any whisper of QE3 and metals will pop 10-20% in a week or less.  We've seen it countless times in the past few years. 

WhiteNight123129's picture

Kito I think you should be a philatelist.

kito's picture

what makes you believe im not?

SRSrocco's picture


Anyone with a proper functioning BRAINSTEM will realize that QE has not stopped even though the BERNANKE and the CLOWNS on the BOOBTUBE tell the world otherwise.

What a fricken charade.  QE has been taking place all along as we sit and have to watch the LIES and GARBAGE from the FED.  I am simply amazed that anyone believes anything that comes from D.C. anymore. 

If you haven't placed your bets in little coins made of GOLD and SILVER and still think your PENSION PLANS, 401K, IRA or CD's will provide you future wealth....well then... its too late to try and KNOCK any sense it ya.

Biggvs's picture

When does Twist end? 10-years seem to think it has ended already.

prains's picture

Ends with the start of hostilities

TruthInSunshine's picture

I've been saying for a month that Bernanke has lost control of rates. He won't try to suppress yields on the long or intermediate end of the curve because he knows he doesn't have the firepower given the other dynamics at play to successfully pull it off (i.e. he won't because he can't).

I will be the contrarian. There won't be any expansion of the Fed's balance sheet. For all those claiming that Twist, ZIRP, or the rumored "sterilized QE" is the same as QE, they're wrong; none of the 3 truly expands the size of the Fed's existing balance sheet.

Watch for more and more frequent headlines of 'Modest Increase in Interest Rates A Positive Signal From Economy,' and such, as they spin.

Jeffrey Saut (a sell-side poster child, but I digress) was out over the weekend saying higher interest rates won't be a problem given the underlying strenth in economic fundamentals, and if anything, higher interest rates will confirm the underlying strenth in economic fundamentals, and this will be the new byline of sell-side.

Look at the rush of corporate share buy-backs (using cheap money) and the corollary rush to sell low yielding corporate debt.

Just this morning, there was a widely disseminated headline of "Expected Rush of Mortgage Re-Financings in Coming Month" or something similar.

Rates are going to continue to rise. The end.

DavidC's picture

I don't know if rates will rise, but if they do then The Fed is toast, leveeraged at over 50 to 1. Bernanke knows he HAS to hold rates at the floor.


TruthInSunshine's picture

Can anyone credibly explain why it would matter, given the size of our deficits and aggregate debt, whether the interest paid on the debt is 250 billion annually or 350 billion annually (or 450 billion annually, for that matter)?

Also, why would "the Fed be toast," assuming interest rates rise?

They don't have to offload anything. They can keep twisting until the cows come home. In fact, they can just sit on the assets, many of them eroding in value, and toxic, for a long time. What would be the catalyst in the short or intermediate term that would put pressure on the Fed to try and seek a profit on its current holdings, or even avoid a loss?


*Spelling Nazis - I meant to write 'strength' in my prior post, rather than 'strenth' (I've been making many typos lately).

GeneMarchbanks's picture

You've (unknowingly?) asked a question that spans a multitude of categories: finance, bond investor sentiment/psychology and geo-politics. The latter is most important to interest rates. Think of rates as being outsourced along with everything else that matters to an industrial economy.

They will not be allowed to rise without some complete left-field shock.

GeneMarchbanks's picture

I'd say trading up, nothing conclusive at least for me. Twist will end then we'll see.

Greenhead's picture

It doesn't matter in the sense that the FED can monetize more debt to pay the interest and then refund said interest (minus a fee) back to the federal gov.  It does matter in that the projected deficit from the interest component and the taxes needed to pay the interest due can be used as a sledgehammer against the productive class in America.

TruthInSunshine's picture

So you are saying that the Federal Reserve actually is concerned with, let alone significantly concerned with, whether the interest component on the national debt has an adverse impact on the "productive class?"

The interest expended on servicing federal debt was 451 billion USD in FY 2011.

Let's assume yields rise 33%, on a smoothed basis, over the next 18 months. They won't rise that much, but I will use higher figures to demonstrate a fundamental point.

That would result in an additional 148 billion in interest that would have to paid to service the debt (just assume for the sake of this debate that the debt doesn't increase; I know that it will, but let's try to keep this simple).

The expected 2012 federal budget is 3.73 trillion USD.

An additional interest component paid of 148 billion USD would represent less than 4% of the 2012 federal budget.

That's deficit pocket change for the fiscally looser than a Bangkok whore U.S. government.

dvsteenk's picture

and Italian 2yr up 11%, 5yr up 6.7%

last Friday Belgium 2yr was up 30%

I guess ECB had pushed down yields far enough, now they'll throw money again on Portugal and Spain...

Voltaire's picture

I think it ends in June

knightowl77's picture

Why June? Elaborate....

I have thought this Ponzi scheme would have collapsed many times in the past and it just keeps chugging along....or circling the drain but never actually entering the drain....

DeadFred's picture

June is the scheduled date.

This is sad for me, having switched from a temporary bullish outlook to full bear last week. Long dated ZH posts are one of the most reliable bullish indicators in existance. I don't want to see a graph that shows the market is likely to turn over two month after the June 2012 end of The Twist. I want my downturn and I want it now! (mostly joking)

slaughterer's picture

Dead Fred, it all blows up in August.  Not until then.  Not until AAPL $1000.

WhiteNight123129's picture

Well, given the rise in rice, sugar, barley, beef, pork, poultry, salmon in teh last 10 years. The long bond needs to yield at least 7% for money to be neutral between borrowers and savers. What happens for housing if the Long bond is that level? Humm?

So you have you answer on future QEs, Bernanke would have a crash with long bond at 7-8%...That is delightful for PMss...