Treasuries Update: Is 'Operation Twist' Working?

by: Doug Short

The Fed's latest strategy for managing the economy, Operation Twist, has about 10 weeks to go. The program was announced on September 21st of last year with the stated purpose of selling $400 billion in shorter-term Treasury securities by the end of June 2012 and using the proceeds to buy longer-term Treasury securities. The Fed assumed this would put downward pressure on longer-term rates, which would stimulate the economy through "a broad easing in financial market conditions." In other words, more loans at lower rates.

How effective has this strategy been? Here is a snapshot of selected yields and the 30-year fixed mortgage since the inception of Operation Twist.

The 10-year note had been hovering around the two percent level for the past few months after hitting its historic low of 1.72 immediately following the September 21st "Twist" announcement last year. Despite the Fed's stated purpose of lowering long-term interest rates, the 10-year steadily rose to an interim high of 2.42 on October 27th, but it soon settled into a pattern of hovering around 2.00 with the one quick dip to 1.82 and an upper range of 2.11. But in mid-March the yield on the 10 surged to a closing high of 2.39 on March 19th and then declined to a hover range around 2.23. Since the mid-March drama, which was certainly counter the Fed's stated intention, the yield on the 10-year has slipped back to the 2.00 level, give or take a few basis points. The 5- and 30-year Treasuries have essentially followed the same script.

The 30-year fixed mortgage, according to the latest Freddie Mac weekly survey, is about where it was in the first weeks of February.

As for loans to small businesses, here's a snippet from the latest NFIB Small Business Economic Trends report:

Financing continues to be low on the list of concerns for small-business owners. Only four percent cited financing as their top business problem, compared to 20 percent citing taxes and 19 percent citing unreasonable regulation. Ninety-two (92) percent reported that all their credit needs were met or that they were not interested in borrowing.

It will be interesting to watch yields during the final two months of Operation Twist. Will they drop further? Rise in anticipation of further Fed intervention? Or continue to oscillate in the current range?

Background Perspective on Yields

The first chart shows the daily performance of several Treasuries and the Fed Funds Rate (FFR) since 2007. The source for the yields is the Daily Treasury Yield Curve Rates from the US Department of the Treasury and the New York Fed's website for the FFR.

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Here's a closer look at the past year with the 30-year fixed mortgage added to the mix (excluding points).

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Here's a comparison of the yield curve at two points in time: 1) today's close and 2) the daily close on the market's interim high on April 29th.

The next chart shows the 2- and 10-year yields with the 2-10 spread highlighted in the background.

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The final chart is an overlay of the CBOE Interest Rate 10-Year Treasury Note (TNX) and the S&P 500.

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The final chart shows the percent change for a basket of eight Treasuries since the initiation of the second round of quantitative easing on November 4th, 2010.
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For a long-term view of weekly Treasury yields, also focusing on the 10-year, see my Treasury Yields in Perspective.

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