Fed Extends Operation Twist, Rates Fall

Arjun Dave
20 Jun, 2012
New York City

U.S. Treasury yields fell after the Fed extended and expanded its Operation Twist program to the end of the year and held target interest rate near zero. The move knocked off rates on 10-year bond to 1.61% and 30-year bond to 2.75%.

[R]1:20 PM New York – U.S. Treasury yields fell after the Fed extended and expanded its Operation Twist program to the end of the year and held target interest rate near zero. The move knocked off rates on 10-year bond to 1.61% and 30-year bond to 2.75%.[/R]

U.S. stocks reversed earlier losses after the Fed announced new measures to stimulate the economy.

The so called Operation Twist launched in September last year with $400 billion program to replace short term bonds with long term bonds will be extended and expanded.

The program was scheduled to expire at the end of this month and will now continue till the end of the year and will be expanded by $267 billion as the Fed hopes to lower long term rates. The Fed also left its program of investing in housing debt supported by government agencies unchanged.

Fed held its interest rate target near zero as it has done since December 2008 and has purchased $2.3 trillion in government bonds to stimulate the economy and support banks in the period.

The weakening global economic growth outlook and rising debt stress in the euro zone has helped the Fed in lowering yields or rates on the U.S. Treasuries.

The 10-year U.S. Treasury bond yielded 1.86% on September 21 when the Operation Twist program was launched and dropped to as low as 1.44% on June on the rising speculation that Greece may leave the euro. The yield has recovered since then to 1.68% on yesterday and dropped to 1.61% after the announcement of the program extension.

The Fed in a statement released today said it will sell Treasury securities of maturities less than three years and purchase bonds with six years to 30 years in maturities.

The net effect of the program is to drive the interest rates lower that will spur and make more affordable loans for home and to businesses.

Richmond Fed President Jeffrey Lacker voted against the extension of the program and casted his fourth dissenting vote in a row this year and said he does not support the Operation Twist extension and last month estimated that the Fed may be forced to raise rates next year.

Central banks around the world are working in coordination to sustain global economic expansion and latest minutes of meetings released by the Bank of England showed a strong bias in favor of stimulus and Bank of Japan indicated its willingness to ease.

Central bank in China cut rates on June 7 and European Central Bank is likely to ease on July 5 meeting after holding rates firm earlier this month.