Twisting and Floating

Operation Twist is entering the twilight of its 15 minutes of fame. Never a fan of the scheme, I'm happy to see it go.  The stock and flow effects of Fed activities will shift in importance post Twist, as the Chairman attempted to point out at the presser. A realization of year old stresses in the Eurozone did more for  "twisting"  than the Fed in our opinion.

On the other side of the magic trick that is QE, the TBAC is ready to give us more information on Treasury Floaters. Let us all agree from the start that, in another place and time, issuing securities with maturities greater than 40 years would be optimal. Treasury was, in fact, extending debt maturity before Twist was activated. Unfortunately, we are in this place and time. Recall that it did not take long in the crisis for T-Bill issuance to soar into the trillions. Issuing floaters of 2 to 3 year maturity allow the Treasury to reduce extreme roll over risk and move beyond 1 year (and conveniently inside the Fed forecast) by offering the variable rate. The GSEs have essentially been government floating issuers for some time. As LIBOR remains catatonic, repo or OIS based anchors seem likely. This could play into a RONIA based reconstruction of the money market. We expect a host of "should" based criticisms to splash the media soon. The commitment to TIPS seems at least equally risky to us.

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