selling of short-term bonds & buying longer-term gov deb

[alvin low]

Quote "
The US central bank said it would sell US$400 billion (S$512 billion) of short-term Treasury bonds to buy the same amount of longer-term US government debt with maturities longer than six years, its latest attempt to kickstart growth that slowed to a crawl over the first half of the year."

How does the selling of short-term bonds and buying longer-term gov debt kickstart growth?

Can anyone explain. Thanks.

[JIMMYKKL]

may be is like factoring.

exchange long term thing with short term cash.

to do monkey thing again.

i guess one.

cheers.

[GML]

Hi Alvin,

There is a video link for this topic in CNN
http://money.cnn.com/video/news/2011/09 ... .cnnmoney/

Cheers!

[alvin low]

Thank GML & JiMMYKKL

So this is call the "Twist" , operation twist.

Cheers

[Dennis Ng]

Quote "
The US central bank said it would sell US$400 billion (S$512 billion) of short-term Treasury bonds to buy the same amount of longer-term US government debt with maturities longer than six years, its latest attempt to kickstart growth that slowed to a crawl over the first half of the year."

How does the selling of short-term bonds and buying longer-term gov debt kickstart growth?

Can anyone explain. Thanks.

QE3 is off for now (3rd round of printing money). Guess Ben Bernanke knows that he only has 1 bullet left (QE3) and he's trying to save the last bullet for last resort. So yesterday instead of announcing printing of money, he announced Sell Short Term Bonds, Buy Long Term Bonds, without printing more money, but just "shuffling" of his cards.

The Stock Markets reacted quite negatively, becos the Expectation of a QE3 was already built into market expectations, so when it is NOT announced yesterday, the markets could NOT help but felt disappointed and showed their disappointment in the markets.

As mentioned, basically, my view has NOT changed, Bull Market is dead, what we might see in the near future, would be just Bear Market Rally or Bear Market Trap. I would only change my view if Dow goes above 12,000 and STI goes above 3,100.

Basically, this strategy that Bernanke announced is "nicknamed" Operation Twist. Basically, without printing more money but just "switching" the "mix" of what Fed holds, in terms of more long term bonds instead of more short term bonds, Fed hopes to achieve the same objective of "printing money", which is to lower interest rates and stimulate the economy.

By buying long term bonds, this drives up demand for long term bonds, and drives up prices of Long Term bonds and lower the Yield (Interest rate) on Long Term Bonds.

By doing so, they try to lower long term interest rates, and hoping that by doing so, they can also keep short term interest rates low, and by keeping interest rates low, it can spur business to expand and grow.

Lower Interest rates on Long Term bonds hopefully would translate to lower interest rates for Home Loans as well, which help lessen burden of homeowners in America.

What is Operation Twist?

Market watchers are anticipating a new measure from the US central bank to stimulate the economy: a radical change in the make-up of the Fed's portfolio of government bonds

Economists and financial traders believe the Federal Reserve will announce a new stimulus measure dubbed "Operation Twist" after its monthly meeting on Wednesday. Can "twisting" (changing the composition of the government bonds held by the Fed) put the US economy on a firm footing?
What is Operation Twist?

When you play the card game pontoon, you have the option to "stick" – keep the hand you are holding – or "twist" – draw another card. Until a few months ago, the Federal Reserve believed it had a strong hand in the battle to kickstart the US economy and was prepared to stick. But recent events have shown the economy struggling and unemployment staying high. Now it must twist.

What happens in practice?

Over the last two years of quantitative easing, the Fed has acquired a hand that includes $1.65 trillion of federal bonds – in other words, loans to the US government. Some of these bonds will mature in one or two years, some not for much longer – up to 30 years. If the Fed trades in some of its shorter-dated bonds for more of the longer-dated alternatives, demand for the longer-dated variety will exceed supply. This in turn will drive up the price of those bonds, which depresses the "yield" – the effective rate of return the holder of the bond gets on their investment. The yield determines the interest rate. Lower long-term interest rates will lead to lower 25-year mortgage rates, car loans and other bank lending rates.
Does it work?

It works in the sense that it is perfectly possible to sell short-dated bonds and buy the long-dated variety and in the process change the make-up of the Fed's bond portfolio. Beyond that, the picture is murkier.
Does it make a difference to interest rates?

The last time the Fed tried something similar was in 1961, when it managed to lower long-term rates by only 0.15 of a percentage point. That is the estimated effect according to some economists. In a 2004 paper, Fed chairman Ben Bernanke downplayed the strategy's significance as a tool for promoting lower long-term rates.
But anything is better than nothing?

With unemployment still high, households struggling to pay off debts and most banks refusing mortgage applications, whatever the interest rate, it seems unlikely that Operation Twist alone would make much of a difference.
Is there anything else the Fed can do?

It's funny how everyone is a monetarist these days, looking to the central bank to manipulate the supply of money to promote growth. Keynesians, who place more emphasis on governments improving sentiment and confidence to lift economies, have been sidelined. Bernanke could increase the size of his hand and buy more bonds across the board to depress short-term and long-term interest rates, but given the other barriers to lending, it seems like a policy that has run out of steam.

[shazamnick]

Quote "
The US central bank said it would sell US$400 billion (S$512 billion) of short-term Treasury bonds to buy the same amount of longer-term US government debt with maturities longer than six years, its latest attempt to kickstart growth that slowed to a crawl over the first half of the year."

How does the selling of short-term bonds and buying longer-term gov debt kickstart growth?

Can anyone explain. Thanks.

It's funny how everyone is a monetarist these days, looking to the central bank to manipulate the supply of money to promote growth. Keynesians, who place more emphasis on governments improving sentiment and confidence to lift economies, have been sidelined. Bernanke could increase the size of his hand and buy more bonds across the board to depress short-term and long-term interest rates, but given the other barriers to lending, it seems like a policy that has run out of steam.

tks sifu,

One question, in this FOMC, what Ben did was changing the 'mix' of bonds holding by the FED and there is no printing of new money? If this is the case, the value of US dollar remain status quo, correct?

[Dennis Ng]

Quote "
The US central bank said it would sell US$400 billion (S$512 billion) of short-term Treasury bonds to buy the same amount of longer-term US government debt with maturities longer than six years, its latest attempt to kickstart growth that slowed to a crawl over the first half of the year."

How does the selling of short-term bonds and buying longer-term gov debt kickstart growth?

Can anyone explain. Thanks.

It's funny how everyone is a monetarist these days, looking to the central bank to manipulate the supply of money to promote growth. Keynesians, who place more emphasis on governments improving sentiment and confidence to lift economies, have been sidelined. Bernanke could increase the size of his hand and buy more bonds across the board to depress short-term and long-term interest rates, but given the other barriers to lending, it seems like a policy that has run out of steam.

tks sifu,

One question, in this FOMC, what Ben did was changing the 'mix' of bonds holding by the FED and there is no printing of new money? If this is the case, the value of US dollar remain status quo, correct?

yes, no additional printing of money for now, so supply of US dollar remains status quo. But the value of US dollar depends on confidence of the future of U.S.

Without QE3, Gold and Silver prices also fell, since if print more money, prices likely to go up....so the expectation of printing money was built in, so no printing of money for now disappoints the markets.

[alvin low]

Thanks Dennis.

but there is one thing I do not get it.

By driving the long term rate even lower who will have want to buy? (the rate of return is lower than inflation).

Would this trigger a selloff and a switch to higher return asset class?

[Dennis Ng]

Thanks Dennis.

but there is one thing I do not get it.

By driving the long term rate even lower who will have want to buy? (the rate of return is lower than inflation).

Would this trigger a selloff and a switch to higher return asset class?

Hi Alvin,
Fed itself is buying. haha.

Well, the reckoning of the US government bond will come, just a matter of time. I think things would unravel in year 2012...when U.S. government bond prices might plunge and causing yields to spike up if inflation rate goes up further from 3.6% currently.

[ngtfook]

Thanks Dennis.

but there is one thing I do not get it.

By driving the long term rate even lower who will have want to buy? (the rate of return is lower than inflation).

Would this trigger a selloff and a switch to higher return asset class?

Hi Alvin,
Fed itself is buying. haha.

Well, the reckoning of the US government bond will come, just a matter of time. I think things would unravel in year 2012...when U.S. government bond prices might plunge and causing yields to spike up if inflation rate goes up further from 3.6% currently.

Dennis, like you said during the graduate meeting this week,
Feb wants to sell milk but no body buy, so Feb drink himself

[Cwlee2777]

Guess Ben Bernanke knows that he only has 1 bullet left (QE3) and he's trying to save the last bullet for last resort.

Hi Dennis,

You mentioned Ben Bernanke is trying to save the last bullet of QE3 for last resort. If the market has crashed before he use it, can he still print money when the yield shoot up during crash?

Thank you.

[ahvyee]

Hi Cwlee2777,

Dennis mentioned before,even if there is QE3, it is only merely a deadcat bounce, stock market may drop another 30%, if QE3 annnounce, maybe only up by 10 to 20%..

[Dennis Ng]

Hi Cwlee2777,

Dennis mentioned before,even if there is QE3, it is only merely a deadcat bounce, stock market may drop another 30%, if QE3 annnounce, maybe only up by 10 to 20%..

Hi all,

I share similar views as yhendra.

My view is the next Crisis is worse than the year 2008 Crisis, and it would not surprise me if Dow goes to 7,000 or even lower than last round of Low in the coming months...

Of course, stock markets do NOT go down in a straight line, there'll be rebounds, but I think the Global Stock markets are officially in a Bear Market.

Dennis Ng

BRACE YOURSELF!!!
Hold on tight on the coming super duper roller coaster ride....

Hmm... you want have some fun? Just for fun!
Here they are:

[1]. I would like to officially declare that ALL World Indices have entered their DOWN trend.
DOW Jones has just joined the rests today!
It's 100MA has officially broken 200MA.
From here then on, any rally will be a bear rally market, dead cat bounce, or whatever you want to call it!

[2]. DOW will likely to close around 10,500; If not that low... well 10,700 will do...
And, if not closed either at these level... what to do... I do not and cannot control the market!
(Right now 22 Sep 2011 at 11:38PM Spore time from Google Finance, DOW is 10,780.79, down 344.05)

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