Fed Might Bring Back ‘Operation Twist’ in 2021, Explained

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Operation Twist is a form of quantitative easing that the Fed uses. Quantitative easing happens when a central bank buys long-term securities to help encourage lending and investment and increase cash flow in the market.  

CNBC reported that Mark Cabana, a Bank of America Global Research rates strategist, told his clients that the Twist, or buying long-term bonds while also selling shorter-term Treasuries, was “the perfect policy prescription for the Fed, in our view.”  

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The mainstream media gave the policy tweak the name “Operation Twist” as a way of referencing how a new monetary policy impacts the shape of the yield curve. Analysts have been speculating about whether the Fed will use this policy strategy again to help smooth out volatility in the market.  

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How Operation Twist works

In 1961, the Fed used Operation Twist and sold short-term government debt in the open market. The Fed used the proceeds to buy long-term government debt. The move didn’t cause enough of a shift to lower the long-term rates, but it did boost the economy by raising short-term rates.  

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 This second Operation Twist so far, with a cost of $400 billion, started in September 2011 and concluded in December 2012.  

Operation Twist’s goal

“The objective is to nudge up shorter-term rates and drive down those at the longer end, thus flattening the yield curve,” CNBC reported earlier in March. Operation Twist intends to strengthen the U.S. dollar and stimulate cash flowing into the economy.  

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Bill Gross hints at Fed Operation Twist in 2021

Former Pimco Chief Executive Bill Gross has hinted at the possible return of Operation Twist in 2021. In an interview, Gross said he had “a hunch” that something like Operation Twist could be coming soon. The Fed would start spending more on 10-year, 20-year, and 30-year Treasury bonds to keep long interest rates down.  

Gross also speculated that the Fed might have already initiated an Operation Twist in recent weeks after bond yields increased. 

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operation twist yield curve

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Yield curve control

The yield curve, as Fidelity explains it, is “a graphical representation of the yields available for bonds of equal credit quality and different maturity dates.” Yield curve control targets longer-term rates by placing interest rate caps on certain maturities.  

View more information: https://marketrealist.com/p/fed-operation-twist-explained/

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