New Move: Operation Twist instead of Quantitative Easing

September 13, 2012, Ben Bernanke, Chairman of the Board of governors of the Fed and Chairman of FOMC delivered a press conference to talk about the monetary policy of this season.  The third round of quantitative easing came out without surprise due to the performance of the economic growth of the United States recently, and it was called by some bloggers as quantitative infinity instead of quantitative easing as it includes mortgage-backed securities purchase until “we see substantial improvement in the outlook for the labour market” said Bernanke at the conference. When asked how we exam the improvement, he didn’t give a clear measurement.  

In addition, he announced to continue operation twist as the maturity extension program.  With going long on long-term securities meanwhile going short on short-term securities, the fed extends the average maturity of the securities in the Fed’s portfolio. This movement downwards the pressure on longer-term interest rates while supporting short-term interest rate, making it move toward the shape of yield curve of Greek bond to some point.

The Greek yield curve last year, as there’s no statistics available this year, shows a complete twist as usual, the longer the maturity, the lower the yield curve due to the current financial crisis.

Well, maybe not this much, but kind of, here’s another graph that shows the different yield of bonds with different maturities.  The gap between long-term bond yield and short-term bond is dropping.

With the Operation Twist, investor no longer willing to invest on long-term securities as the yield is low and inflation is down the way.  They turn to invest on stock market and corporate bonds which booms the economy as the QE does. But with OT, there is no extra liquidity pumping into the system so that it won’t has too much pressure on inflation as QE.  

It is a very nice tool!

But what I am concerned is that the fed’s invest on long-term securities but can’t get the yield it deserves as the risk is high and the return is sensitive to interest rate, but the interest rate stays low due to its own policy, the cost is huge!