The Federal Reserve has decided to put on its dance shoes and hit the bond market floor twisting.
Trying to calm the American bond market, the regulator now contemplates returning to the so-called Operation Twist. The Fed ran the program for the first time in 1961. Its concept is simple: to sell short-term bonds and buy long-term ones. The central bank is expected to make the move in the wake of a record spike in yields of long-term bonds over the past 11 years. Operation Twist should increase their price, thus flattening the yield curve.
Currently, the Fed negotiates with primary dealers of the bond market trying to understand whether such a move is appropriate. A source close to the situation says that the program is highly likely to be launched shortly.
Rates strategist at BofA Mike Cabana is one of the supporters of this idea. "Twist is the perfect policy prescription for the Fed," he said in early March. Cabana believes that the main problem with US bonds is high liquidity which the market is unable to absorb. Treasuries are under pressure as there is a lack of bond buyers. Thus, the 10-year yield jumped to 1.5% at the end of February from 1% at the beginning of the year, while 30-year bonds advanced by over 1.6% for the same period.
