Thursday, November 17, 2011

The Signature of the Twist

Below is a chart that shows how the Fed's Operation Twist is targeting treasuries of various tenors. Basically it's selling the 2-3 year tenor and buying the 7-10 year, with a bit of longer maturities sprinkled in.


The impact of Twist on the market was clearly visible today. Typically on a day like today with equities down 1.7%, the two-year treasury would be bid up, but today it actually sold off.

1-Day Move in Treasury Yields (Bloomberg)

Going forward this may become a more common occurrence as the Fed tries to engineer a curve flattening. What remains to be seen is whether this will have any impact on the economy, particularly as credit spreads continue to stay elevated.
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