Thursday, January 19, 2012

Operation Twist update

Part of the explanation for the strength in the longer term treasury markets continues to be Fed's Operation Twiest
Businessweek: “The Fed purchases were constructive for the market, especially in a low-volume environment,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut.
The chart below shows net purchases and sales (market values) of treasuries by the Federal Reserve since October 3d.  They've been targeting the 7-year, the 10-year, and the 30-year treasuries (including TIPS) against the 2 and 3-year notes.  Some of their rationale for the program was to bring down mortgage rates, a goal that was accomplished in part by the eurozone crisis that strengthened the dollar and created demand for treasuries.

Operation Twist: Fed's purchases and sales (market value, not notional) of treasuries by maturity ($ billion) - including TIPS
Operation Twist is expected to end in June of this year.  To the extent we have any sort of stabilization in Europe, some of the flattening of the yield curve we've seen in the last six months will be reversed in anticipation of the program's end.

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