On September 21, 2011 in a Federal Reserve Press Release the Fed announced “Operation Twist” purportedly to drive down long-term rates and drive up short-term rates.
The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
“Curve Watcher’s Anonymous” has a report that shows how banks profited by front-running of the trade.
Banks Front Run the Trade
Time to Cash Out
“Operation Twist” a Success or Failure?
The stated goal of Operation Twist was to lower long-term rates and drive up short term rates. By that measure, the Fed’s policy was a miserable failure. As the above charts show, 5-year, 10-year, and 30-Year yields are all substantially higher than when the program was announced on September 21.
“Operation Pad Bank Profits” a Stunning Success
However, banks knew this operation was coming and played for it in advance. With the program scheduled to end in June, it’s time to take huge profits by selling the garbage back to the Fed.
That yields are higher now than when the Fed announced the program is irrelevant. That those on fixed income have been hammered mercilessly by Fed policies is irrelevant as well.
The Fed’s real goal was not the stated mission, the real goal was to find still more ways to bail out banks at taxpayer expense. The Fed clearly succeeded in the real mission. This is yet another triumph of the 1% over the 99%.
Mike “Mish” Shedlock
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