Operation Twist Expectations (or LSAD) Returning With A Vengeance Explains Today's Moves In Stocks And Gold

Tyler Durden's picture

Whether the Fed will upgrade QE2.5, or "ZIRP through mid-2013", to QE3, or Operation Twist, the form we have been predicting it would take since May (and here), is still unknown: very few people know what Bernanke will say on Friday, minutes after the first revision to Q2 GDP reveals a sub-1% number. What is known is that while cross-asset correlation has soared over the past few days, the biggest driver of stocks over the past few days has been nothing but the 2s10s30s butterfly, which in turn is driven by On and Off rumblings of Bernanke doing the Twist. And here is the rub: when the Fed announces Twist it will be extending duration, it effectively means selling everything 10 Year and older (yes, QE3 could very well be LSAD or Large Scale Asset Dumping instead of LSAP). The goal of this action: make the 2s10s will go vertical and to pancake the 10s30s: a move that the butterfly is now indicating it is once again pricing in - today alone we have seen a massive 15 steepening in the butterfly: a nearly 20% move in the curve. It also explains why gold is being sold off today, because simplistic investors believe that without an actual balance sheet expansion, the Fed will not be diluting paper. Completely wrong: it will merely do so synthetically, from a duration basis. Furthermore, the market will very soon read through the Fed's intention which will be predicated entirely on asset rotation and not on incremental fiat capital. The final outcome will be QE4 where the Fed will have to match the synthetic duration extension with actual cash bond deliverables, namely monetizing bonds, a move which will be even more critical once the deficit spend starts soaring again in the next 3 months. And when it does, it will have to do so double time, to make up not only for previous synthetic exposure extension, but for future priced in moves. In other words, nothing has changed, and we fully expect stocks to soar if indeed Bernanke mentions "duration extension", together with yet another gold dump. The issue is that Op Twist in the proposed format would be physically limited by the amount of 10 Year+ bonds held in the Fed's SOMA. At last check it was not that many at all. So any surge in stocks will be albeit both painfully transitory.

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gatorontheloose's picture

just about everything (incl PMs) just got bid at 15:30 except TLT   lol what a joke

OuaisBla's picture

Is it the time when contracts settle for the day on the NYMEX.

egdeh orez's picture

Hey Tyler,

I have another way of explaining the move in stocks, gold and treasuries.  Please tell me why you think I'm wrong.

I think that the market is saying that there's no QE3 imminent.  Investors had been buying treasuries and gold in expectation of QE3... those investors now think there's no QE3 so they sell gold and the 10yr (which was the maturity that they think would've been the target of QE3).  As for why stocks is moving up?  It always moves up on low volume days so that's telling us nothing.

Is my scenario possible?

slewie the pi-rat's picture

tyler is drinking heavily.  again

yep, it's certainly "possible" as the cause or "a cause" but that is speculation as we hear by talking heads saying "the price of tea in china went down, today, because..."

tyler is not speculating as to cause and effect, here, if i read him correctly

he is talking about correlation, not causation

CosmicBuddha's picture

I thought the gold dip was brought about by margin hikes.

Waffen's picture

Does anyone have a good interpretation that we can understand?


This is what I have gleened, am I right?


Near Term


30 year rates lower

10 year rates higher

2 year rates 0%

Result = this will pop bond bubble and send people into stocks


Stocks up

Result = metals down (as idiot fund managers leave safe haven)


Now after a short while (no idea how long that is supposed to be) (this is still very foggy to me) somehow the unicorns and rainbows actually expand the money supply and the MOMOs finally catch on and metals go back up. (my mind is still full of fuck with this part)


can someone please explain this shit?



Bubba Schwartz's picture

Bernankster thinks that by artificially avoiding the inverted yield curve we can avoid recession.  Talk about grabbing at straws.  The further a market is from being able to realistically price a product, the more unstable the market becomes.

This is nuckin' futs. 

CrashisOptimistic's picture

This whole scenario is unlikely.

Selling long duration instruments to drive up those rates would destroy what little housing market remains.  

This is speculation.  I don't see it coming.

I think Bernanke will discuss some innovative maneuvers and buy no bonds whatsoever, and certainly not sell any.

He's inventing bullets.

zhandax's picture

This whole scenario is unlikely.

Actually, it could have a prayer of working if it didn't collapse the system (how that happens is at the bottom).

At first glance one would think that the last thing to do when extending duration is selling 30s.  I was also thrown off by the expression 'pancake the 10s30s'.  I think the plan Tyler is hinting at is to bring the 10y yield down to ~parity with the 2y and push up the 30y yield.  You would expect this to produce a ~2+% mortgage rate.  If even that doesn't stimulate the housing market it may at least prompt some hedge funds to try house flipping.

I don't have the weighted duration of the Fed's holdings on the top of my head, but do recall that most of their purchases were in the belly of the curve.  Rolling those out to 10y in sufficient volume to bring the 10y to parity with the 2y will increase weighted duration, even while dumping $1.6B in 30s assuming that figure, quoted somewhere in here, is correct.

Where the doomsday scenario appears is coupling this with the drop of IOER to 0%.  I wrote elsewhere in 2008 that the Bernank had constructed himself a rheostat for the money multiplier.  Dropping IOER to 0% is the equivalent of cranking the stero all the way up.  In college, that would get you kicked out of the dorm.  In real life 2012, that will send gold to $5000/oz. along with food, gas, and everything else.   Sweeping $1.7T in excess reserves into the ecomony, even it it just gets parked into securities, will blow the roof off of prices and drive the last nail into the coffin of anyone not in the top 1%.  And this fucktard thinks he can stop inflation in 15 minutes.

There may be another $100 downside to gold if it takes a day or so to digest the implications, and you damn well better be loading the boat.  May be the last chance to get it cheap.

theMAXILOPEZpsycho's picture

someone fill me in on what he means by synthetic duration extension??

Brian's picture

I second this request.  In fact, I'd love to have a layman's description of what "Operation Twist" really means, and how it acts to add liquidity or otherwise function as Quantitative Easing.  I can't find a real discussion of this anywhere...


Bob's picture

How many billion in long Treasuries are on the Fed balance sheet?

Duffminster's picture

Tyler, for some reason this link keeps coming up "blank" from where I sit.  Must be getting a lot of hits or else something else is wrong.   Hope you move ZH to a fully scalable system that adapts and use the indepdent servers just for backup to protect from the likely suspects.

smlbizman's picture

how about this operation twist....the bernank gs, jpm, bac et al are walking in the desert and gs, jpm,bac, et als. get bit by a deadly snake in the dick...they send ben to the doc to save them {qe3}...doc says you have to suck out all venom and they will live....ben gets back , what the doc say....doc says your all gonna die.....so how are the chairs restructured if ben sacrifices his boys...no qe...

BlackholeDivestment's picture

...so what yerr saying is, we are in Dire Straits Twisting By The Pool, dark pool ...that is. lol http://www.youtube.com/watch?v=WMX_B8Iumsg

Poetic injustice's picture

This video contains content from UMG. It is not available in your country.


There you go, music owners do hate Europe :P

narnia's picture


I don't see how weighting the Fed's balance sheet with shorter maturities is creating a synthetic bond...  unless the Fed went into a net short position in the 10s & 30s.

The Fed sees an obvious liquidity preference (and people still perceive these instruments as liquid).  Driving down the short term to worthless & forcing anyone chasing yield into falling longer term maturities is exactly what the Treasury wants.  Plus, the Fed makes a profit on the sales, which it can use for future monetization... which is coming.


Jvee's picture

Riddle me this batman-

S&P downgrades long term and says short term still ok. Based upon this - the 10 yr "should" rally and the 30 "shoulld" sell off with BurnHankee's sleazy prints no where to be found- but I'm sure that our ratings agencies and politicians would never try to pull something like that

jm's picture

Bond futures have to be delivered.

At120's picture

The Fed has a ton of MBSs from QE1 and QE-Lite.

Mortgage rates are strongly influenced by the yield of the 10 year bond.

As we continue to move into a recession, more people are likely to default on their mortgages.  This would screw the Fed further.

The Fed plans on buying lots of 10 years to keep the 10 year rate absurdly low.  The goal is for people to then refinance their ARMS into fixed products that have monthly costs that are a lot easier for Joe Blow American to deal with.  Obviously, this requires some ball playing from the banks, since most of these mortgages are massively underwater.

They plan to somehow offset this by not buying shorter duration bonds, like the 2 year, causing those rates to rise.  This willl likely also cause outside / international money to flow back into shorter term securities. 

This can also be considered QE 2.5.  By buying as many 10 years as they can, the Fed will be monetizing debt again.  The primary dealers (the big banks) will once again buy as many 10 years as they can in the auctions and then flip them back to the Fed for a profit. 

Unlike QE2, there is no definable finite end to this program (although it's likely to go through to 2013 once ZIRP disappears) and by starting this, they could go over their head on the purchase of 10 years.  At least w QE2, the Fed already had a defined limit for how many bonds they would buy.  In this case, they will continue to purchasing as many 10 years as necessary to keep the yield down to their predetermined amount.



hunglow's picture

Composite strap-on but I'm only guessing.

Turd Ferguson's picture

"It also explains why gold is being sold off today, because simplistic investors believe that without an actual balance sheet expansion, the Fed will not be diluting paper. Completely wrong: it will merely do so synthetically, from a duration basis. Furthermore, the market will very soon read through the Fed's intention which will be predicated entirely on asset rotation and not on incremental fiat capital."

I'd also add this as a very real possibility:


trav7777's picture

so the Fed is going to reverse repo cash to the banks?  Aren't the NBRs the banks' cash?

Sudden Debt's picture

That's the first easy to read article about all this shit I've seen all day.

Thx Turd!


Hooligan's picture

Tyler, I don't know what your relationship is (if any) to a guy that I hear on the radio at 5:00 PM in Atlanta on AM 1190. His name is Bill Tatro, and I swear he blatantly steals material from this site everyday.

http://www.moneyradio1510.com/Audio-Archive?id=4032 Listen for yourself....

Turd, Nice article... Tatro is claiming this reverse repo idea is his as well.....

OpenEyes's picture

CME just hiked margins on gold by 27%!  Sorry no link, just a bulliten on Marketwatch

looks like another dip to buy tomorrow.

Sean7k's picture

Thanks Turd. Nice article.

centerline's picture

I would think it would also suggest that anything moving against the banking sector - such as massive foreclosure issues for example - need to be swept under the rug awhile longer to avoid any hits to capital.

Stax Edwards's picture

Excellent Find Turd.  This would explain the "testing" of RR's the fed initiated here a couple of weeks back.  I had not figured out why they were wanting to test a liquidity draining mechanism during a liquidity crunch.  Still trying to grasp the implications of this as monetary policy becomes harder and harder to decode.  I can't swear I fully grasp the implications even now.   Bullish for GS I am sure......  Disclosure:  Going long residential real estate.  Prices in FL are back to the mid 80's, for real.  Growing tired of these phony paper markets.  F'n impossible to decode anymore.

Ag1761's picture

Does this mean they will prolong the reset now and PM's will dip even more?

I bought a wad of silver this week at $43, never thought I'd see it below $40 again, now testing $39 ffs.

Where will it go over the next month, I've given up trying to predict this market.

nyse's picture

Everyone keeps saying that the Fed is out of bullets. But each time they have said this in the past, the Fed has simply used a new gun. This a great article and I appreciate you sharing it.

Sudden Debt's picture

so... there won't be a happy ending?

buggar.... buggar buggar buggar....


RobotTrader's picture



25 consecutive days of -1000 TICKs, that is a new record by a long shot.

Through yesterday, a -1300 TICK 6 consecutive days, unheard of.



Will be interesting to see how strong of a rally we get out of these lows based on the "panic" selling that has occurred the last month.

fuu's picture

How does "panic" last for a month?

fyrebird's picture

Panic just needs to find a new host every few days, that's all. This shit is easy for the real playerz.

LawsofPhysics's picture

Tyler - bullish on equities, who would have thunk it?

LawsofPhysics's picture

Forgot my < sarc > flag.  Didn't mean to scare you.  This is basically "paper on paper" porn.  Very inflationary, serious about that this time, not being sarcastic.  Very inflationary, the 70's will be remembered as the good old days.

hedgeless_horseman's picture



Stocks are only going to go up in nominal terms, not real terms.

Want real inflation data?  I went shopping for school supplies for my kids yesterday.

One 3-ring binder w/ 80 sheets of college rule paper...$15.09!


Durable front and back plastic covers!!!!

Stax Edwards's picture

WTF?  Is that really what supplies cost these days? Jeebus, glad I aint got kids.  That is downright awful.

Trimmed Hedge's picture

Sure, at first glance it might seem a little pricey.

But then again, it is rated 5 stars. (Probably not by Standard & Poor's, though.)



FubarNation's picture

Stop shopping at Whole Foods for your kids school supplies then.

fyrebird's picture

Yeah but it says right on the cover that it's a hybrid.

You pay more for any kind of hybrid technology these days. Toyota and Ford just entered into a deal. Hybrids will be everywhere.

Oh. Wait ...

Ag1761's picture

Yeah, the passenger side has a shorter half life than the driver side

vast-dom's picture

stay present. stay patient. all of your shorts will fluctuate but in the medium term you shall all make killings.