Posts Tagged ‘Antal Fekete’

Keith Weiner explains:

“Operation Twist” as the financial blogosphere has been calling it, is simple in its mechanics. Sell short duration and buy long duration Treasurys. I am not sure that I believe they will sell anything. They surely do not want the interest rate on the short end of the yield curve to rise, much less for the yield curve to invert! But perhaps demand is so strong that they haven’t had to manipulate short end anyway for months? I don’t know, and they aren’t saying.

By plowing money into the 6-30 year maturities, they will push up bond prices there. Since the interest rate and the bond price are a see-saw, mathematically and rigidly related, this will push down the rate of interest on 6+ year bonds. I would guess that the Fed thinks that this will spur more borrowing and lending. The theory is that with lower rates, businesses will make a case to borrow for new projects (I think they have many reasons not to.) And investors will be forced to take more risk to earn a decent yield. Maybe, but I remain doubtful.

Some of the (unintended?) consequences:

7. Assuming any business does borrow at the new, lower rate, it will have a permanent competitive advantage over its competitors who borrowed at the old, higher rate. The new borrower will either be able to produce the same good at lower cost (due to lower debt service) or be able to attract customers to the new restaurant, hotel, resort, cruise ship, shopping mall, etc. Customers love higher ceilings, lavish landscaping, opulent gilding dripping from the marble columns, etc.

8. Thus capital destruction will continue and accelerate.

9. The process of halving of interest rates will continue. It is just as damaging to go from 1.5% to 0.75% as it was to go from 12% to 6%.

10. Debt accumulation will continue.

11. All, of course, until it cannot continue.

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