Fed Continues Operation Twist

Includes: TLT
by: Tim Shaw

Back in September of 2011 the Fed chairman Ben Bernanke announced Operation Twist, which I wrote about here. Wednesday the Fed announced a continuation of the same program and that interest rates will remain low through 2014. The continuation program of selling shorter term treasuries and buying longer dated treasuries are an attempt to keep bond yields low. The program will run until the end of 2012 and will total 267 billion.

The initial program was estimated at 400 billion, which is set to expire. Similar to the original Operation Twist, the Fed's balance sheet will not expand as it did during the release of QE1 and QE2 (quantitative easing). How did bonds react after the announcement of the continuation of this stimulus package? Below is the 10 year bond TLT.

click to enlarge

This move by the Fed looks like it was telegraphed and expected weeks early as bonds put in an all time high as seen from the chart above.

Under QE1 & 2, the Fed's balance expanded by purchasing mortgage backed securities and treasuries, and the liquidity found its way into stocks, commodities and bonds worldwide. I don't see this stimulus continuation being as equity friendly as the prior two stimulus packages that did not see a rapid economical improvement when all was said and done anyway.

Bottom Line: I am not sure what another few basis points lower will do to spur the housing market. Also, unlike QE1 and QE2, this package will not have a direct effect on stocks or commodities, but should lift longer maturing bonds (lower yields) in an effort to boost the housing market.

Thank you for stopping by.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.