Description of Operation Twist 2.0 from the September FOMC:
To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative.
Over the week, the yield curve has indeed been twisted. The FOMC statement is released on September 21. I plot the yield curve for the 19th (Monday) and the 23rd (Friday). The data is the US Department of the Treasury’s constant maturity yields.
The possibility of an operation twist has been on the news for quite a while. So if you believe in efficient markets and announcement effects reflecting most of the impact from the policy, then the above chart is perhaps an understatement. If I look at the yield curve from the August FOMC to the Friday after the September FOMC, the effect is potentially greater. However, here the issue is the flight to quality effects due to the European situation over the past month. So the graph below might instead be an overstatement of the effects. Looking at only the 10yr yield, the range is from 13 basis points (top graph) to 36 basis points (bottom graph).
Going back to my August 16 entry titled “Announcement Effects of FOMC, August 2011,” the yields at the short end (I look at 6mo and 2yr yields below) remained depressed. I.e., potentially, the effect of the policy to guide the future path of interest rate continues to hold the rates down. (Though again, this can also be due to flight to quality as the result of the Europe/Greece situation.) What I find a bit surprise is the fall in the 2yr and 6mo yields started back in August 1 and not August 9. August 1 is the date of the unscheduled FOMC meeting held to discuss the government budget situation. (See the August 9 FOMC Minutes for details.)
Reference: Daily Treasury Yield Curve Rates [US Department of the Treasury],
FOMC Minutes, August 9, 2011 [Board of Governors of the Federal Reserve System].