Operation Twist Failing Already / Its Not The Rates!
A: The fed clearly is worried about global growth and took some expected yet crazy actions today to try to proactively impact longer term yields. Prior to the announcement, 10YR Treasury yields were at 1.92% + 30YR yields at 3.1%, apparently too high for today's appetites - r u kidding me Ben Bernanke! You see, according to the fed, that is why we are not seeing growth...because rates are too high. You have to ask yourself if you really believe that?
Basically the fed announced that rates will remain manipulated until mid 2013 citing "significant downside risks to growth", and that they will sell their short term treasury holdings (aprox $400bln) and use that money to buy longer dated treasuries in an effort to keep longer dated yields down from already record lows. In addition, they will reinvest maturing agency debt principal into buying more agency securities.
The immediate effect this had was to push up short term yields and push down longer dated yields, in effect flattening the curve. This is very non-bank friendly and I just don't understand how in a bank recapitalization environment like we have been the past few years, you would want to do this when long term yields were already pushed to record lows by natural market forces pricing in future downside risks that we already knew about?
I discussed this on Monday stating, "The article also talks about how the fed can sell their short term securities and buy longer dated ones...what would this accomplish really? First off, that would kill the bank recapitalization effort that is ongoing and second the fed naturally will have much more difficulty trying to manipulate rates at the longer end of the curve - their control is at the short end. "
Yet they did it and here we are. Are we no longer even considering potential future unintended consequences of all this action, this manipulation of markets?
On Kudlow this evening one guy (Jim LaCamp) had it right and argued this exact same point (click the image for the video: fast forward to the 4:18 mark):
CNBC transcript: Jim LaCamp: "look, the further you go out on the yield curve, it encourages risk in a yield curve. Where it flattens out, you are not encouraging risk. At the same time ben bernanke is discouraging risk, he's telling you that the economy stinks, too. This makes no sense whatsoever. Ten years & Thirty years yields are sitting at all time lows. They do not need help from ben bernanke and at the same time, we have the bank downgrades going on. This is a serious problem and nobody yet has talked about europe. the three biggest u.s. banks, their debt to gdp is 39%. The three largest french banks are 250%. not only do we have these problems going on here, things are getting worse in europe."Yes, exactly, rates are not the issue here! Thank you Jim LaCamp for speaking some common sense. If you think this is wrong can someone please explain the other side of this one to me, because I just don't get it.
And here is the quote from today that got me to start drinking an hour earlier, courtesy of Yahoo's "'Very Unusual' Fed Action Fails To Boost Animal Spirits: Dow Drops 285":
For the record, former fed governor Mark Olson says he would have voted for Wednesday's action if he were still a voting member of the FOMC. "I would have because I don't see any downside risk to it," he says. "Should inflationary pressures start to build, it's a circumstance where they can adjust that portfolio just a quickly and reduce the size in a way that won't have long-term negative implications."Oh, no downside risk huh with long term rates down so much already without any fed action? Let me ask you this: WHAT HAPPENS IF/WHEN INFLATIONARY PRESSURES DO RISE, AND US TREASURY YIELDS SURGE AS THIS MASSIVE ONE-WAY TRADE REVERSES? The fed is now going to sell $130bln+ in longer dated treasuries onto the open market while everyone else ditches their longer dated treasuries at the same time? What do you think that added selling pressure in the fed's "unwind" will do to yields if/when 'inflationary' pressures actually do start to build, as this guy says? That is what you call a potential unintended consequence of market manipulation, even if it is years away. If rates surge in the years to come right as we start to turn the corner, you can blame the Fed for that one!
The idea that rates are too high now to promote borrowing and growth is short sighted. Rates are already very low right now from the markets pricing in upcoming pressures to global growth; acting as a natural stimulant to invest in riskier assets. We didnt need this added action unless something else is cooking. I fear maybe the fed worries about something deeper in the near future and is taking this action to both appease markets and put forth policy initiatives to prepare for a possible near term event in Europe. I dont know.
By the way, three fed governors dissented this move: Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, all who did not support additional policy actions at this time - bravo to these guys. The list of fed dissenters grows, albeit slowly.