Zero – Now Twist

The zero print on NFP has upped the cry for the Fed to "Twist" the curve. First, some background: the term comes from a prior plan to SELL short dated securities and use the proceeds to buy longer dated ones. Today the Fed has a large portfolio with a duration target around 6 years, built with the hope that they were acting around mortgage duration and hefty available supply. The duration is presently 4.9 (thanks to @bondscoop). They continue - even now - to reinvest maturing and extinguishing securities with Treasuries. The USA has total obligations with a 4.5 year duration even though the Treasury has reinstated the 30 year bond. The Treasury Sec. has/had a desire to extend that number, at secular low yields, it should.
So, should the Fed play along? What would be the desired result? How much has market moved the curve for them? What points should be targeted? The "permanent zirp" language has already de-sloped the 2/10 curve substantially. This carries risks to the banking system for simple term structure reasons. Few Op Twist advocates distinguish between "active" and "passive" twisting. Extinguishing SOMA debt could easily be re-invested at longer points. Even passive moves could equate to taking out 123B in 10 year supply by our count. Coupled with a GSE mortgage plan, the numbers accelerate.
Now the inside baseball. The system would accommodate these policies through the "Butterfly". That is, they would prefer to be short the 2 (or 5), long the 10 and short the 30. (sorry for the 101) Ooops, that position hurts their term structure foundation. The introduction of a 20 year security (thanks Tyler/Zerohedge) could help shift the butterfly legs. Can you get several 100 B out fast enough? The Treasury should be issuing 50 or even 100 year bonds but that's a different story. Is QE3 a twisting operation at a higher balance sheet threshold? No one ever says.
I don't agree with the need or the hoped for result of Twist. Exit, should it ever come to pass, would be impossible. If "held to maturity" is the real exit strategy, we have walked far enough out the plank. A lot of questions, very few answers. Tossing around a catchy name without examining the policy details won't cut it.

3 thoughts on “Zero – Now Twist

    1. kevin Post author

      good question. none of the advocates – Rosenberg, Roubini et al – have told me that. i think its a silly program.

      1. Ivan

        My simplistic interp: Telegraphing (as opposed to actually executing) the Twist tool is a way to show non-believers that the Fed has a lot more bullets.

        Switching to a tennis metaphor — the Fed can increase the power of the racquet, but only at the expense of controlling where the ball goes. I just want to know where they’d LIKE the ball to go.


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