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Here’s One Way to Do the Twist


You can’t swing a dead cat around here without hitting a new analyst note saying “Operation Twist” is coming. So let’s try to figure out how to make money on that sucker. And then get rid of all these dead cats. Why are there so many dead cats in this office?

First, a bit of semantic housekeeping on what we’re talking about when we say “Operation Twist.” Generally, it’s being used to describe some procedure by which the Fed lengthens the maturity of bonds in its portfolio.

How it actually accomplishes that feat is a matter of a little controversy. Some say it’ll spend the money from expiring stuff on its portfolio and use the proceeds to buy longer-dated bonds. Others say it’ll actively sell shorter-dated stuff and use the proceeds to buy longer-dated stuff.

The distinction is important, at least when it comes to trying to front-run the Fed and make money, which is all that really matters in today’s sad, sad excuse for a financial market.

Barclays Capital rates strategists think the Fed is going to be using the dump-and-pump method:

If operation twist is designed to absorb the same amount of duration that QE2 did, the Fed would not only need to change the reinvestment policy to focus on the 10 year sector, but would also have to sell most of its short-end holdings.

One of Barclays recommendations is to short 3-year Treasurys. Sure enough, what’s happening today, but 3-year Treasurys are down, even as 10-year Treasurys are getting snatched up, driving their yields to 2% at last check, in what will likely be a record low close.

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