Rising Rates Coincide with End of Operation Twist?

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Over the past four years Fed policy has had a counterintuitive effect on long term interest rates.  Interest Rates have generally risen when the Fed is buying Treasuries and have generally fallen when the Fed is not.

The only exception is that rates did fall during operation twist, which was by far the most effective Fed policy when it came to flattening the yield curve.  One possible explanation for this is that unlike QE, operation twist was a sterilized program, meaning that the Fed’s balance sheet didn’t expand.  This may have helped to stem inflation expectations while the Fed was purchasing Treasuries allowing the Fed’s purchases to have a greater effect on interest rates.

Given those dynamics, it’s noteworthy that the recent rise in long term interest rates has almost exactly coincided with a depletion in the Fed’s holdings of short term Treasuries and the end of operation twist.  During operation twist, the Fed sold almost all of it’s $160 B worth of Treasuries with <1 year maturity, so there wasn’t much room left for sterilized purchases.

 

Short Term Bonds Rising Rates