Operation Twist Expectations (or LSAD) Returning With A Vengeance Explains Today's Moves In Stocks And Gold
Whether the Fed will upgrade QE2.5, or "ZIRP through mid-2013", to QE3, or Operation Twist, the form we have been predicting it would take since May (and here), is still unknown: very few people know what Bernanke will say on Friday, minutes after the first revision to Q2 GDP reveals a sub-1% number. What is known is that while cross-asset correlation has soared over the past few days, the biggest driver of stocks over the past few days has been nothing but the 2s10s30s butterfly, which in turn is driven by On and Off rumblings of Bernanke doing the Twist. And here is the rub: when the Fed announces Twist it will be extending duration, it effectively means selling everything 10 Year and older (yes, QE3 could very well be LSAD or Large Scale Asset Dumping instead of LSAP). The goal of this action: make the 2s10s will go vertical and to pancake the 10s30s: a move that the butterfly is now indicating it is once again pricing in - today alone we have seen a massive 15 steepening in the butterfly: a nearly 20% move in the curve. It also explains why gold is being sold off today, because simplistic investors believe that without an actual balance sheet expansion, the Fed will not be diluting paper. Completely wrong: it will merely do so synthetically, from a duration basis. Furthermore, the market will very soon read through the Fed's intention which will be predicated entirely on asset rotation and not on incremental fiat capital. The final outcome will be QE4 where the Fed will have to match the synthetic duration extension with actual cash bond deliverables, namely monetizing bonds, a move which will be even more critical once the deficit spend starts soaring again in the next 3 months. And when it does, it will have to do so double time, to make up not only for previous synthetic exposure extension, but for future priced in moves. In other words, nothing has changed, and we fully expect stocks to soar if indeed Bernanke mentions "duration extension", together with yet another gold dump. The issue is that Op Twist in the proposed format would be physically limited by the amount of 10 Year+ bonds held in the Fed's SOMA. At last check it was not that many at all. So any surge in stocks will be albeit both painfully transitory.
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just about everything (incl PMs) just got bid at 15:30 except TLT lol what a joke
Is it the time when contracts settle for the day on the NYMEX.
someone fill me in on what he means by synthetic duration extension??
I second this request. In fact, I'd love to have a layman's description of what "Operation Twist" really means, and how it acts to add liquidity or otherwise function as Quantitative Easing. I can't find a real discussion of this anywhere...
--Brian
From May 31: "In Preparation Of The Fed's Last Doubling Down: David Rosenberg Believes QE3 Will Be Nothing Short Of "Operation Twist 2"
How many billion in long Treasuries are on the Fed balance sheet?
your starter for 10.
Bond futures have to be delivered.
Composite strap-on but I'm only guessing.
"It also explains why gold is being sold off today, because simplistic investors believe that without an actual balance sheet expansion, the Fed will not be diluting paper. Completely wrong: it will merely do so synthetically, from a duration basis. Furthermore, the market will very soon read through the Fed's intention which will be predicated entirely on asset rotation and not on incremental fiat capital."
I'd also add this as a very real possibility:
http://www.financeandeconomics.org/Articles%20archive/2011.08.17%20Bank%...
so the Fed is going to reverse repo cash to the banks? Aren't the NBRs the banks' cash?
That's the first easy to read article about all this shit I've seen all day.
Thx Turd!
so... there won't be a happy ending?
buggar.... buggar buggar buggar....
25 consecutive days of -1000 TICKs, that is a new record by a long shot.
Through yesterday, a -1300 TICK 6 consecutive days, unheard of.
http://stockcharts.com/h-sc/ui?s=$TICK&p=D&yr=0&mn=6&dy=0&id=p37322057532
Will be interesting to see how strong of a rally we get out of these lows based on the "panic" selling that has occurred the last month.
How does "panic" last for a month?
Panic just needs to find a new host every few days, that's all. This shit is easy for the real playerz.
Tyler - bullish on equities, who would have thunk it?
Read the full post.
Forgot my < sarc > flag. Didn't mean to scare you. This is basically "paper on paper" porn. Very inflationary, serious about that this time, not being sarcastic. Very inflationary, the 70's will be remembered as the good old days.
Stocks are only going to go up in nominal terms, not real terms.
Want real inflation data? I went shopping for school supplies for my kids yesterday.
One 3-ring binder w/ 80 sheets of college rule paper...$15.09!
Durable front and back plastic covers!!!!
stay present. stay patient. all of your shorts will fluctuate but in the medium term you shall all make killings.
agreed
So how will flatenning the long end of the curve help housing rates. I see this as hindering. Wouldn't this cause 10Y rates to rise additionally?
it is option experation week. We must stick to the script. Forced or volunteerd.
Yup, and I was planning on a downward move prior to opex to buy in to more silver -- and was pretty suprised when it hadn't materialized by yesterday. What a difference a day makes! A few more pennies and I'll already be profitable with today's purchase.
Damn, these guys sure are predictable.
AEM and NEM almost unchanged.
GDX/GLD Ratio Traders are about to get "Gang-Banged"....LOL...
There will be no happy ending unless you go to the Asian massage parlor located in the service alley open after nightfall.
...the Pursuit of which is guaranteed to all under the Rights of Bill.
I don't claim to understand everything being said above, but sure sounds like they're submerging this golden beachball further and further underwater.
I thought twist was Selling the 2 year and Buying the 30 year, not Selling everything 10 year and later? I thought the fed wanted to extend the duration on their books, and would do that by purchasing long duration bonds and dumping short duration, shortening the duration available in the market. Can you explain "And here is the rub: when the Fed announces Twist it will be extending duration, it effectively means selling everything 10 Year and older (yes, QE3 could very well be LSAD or Large Scale Asset Dumping instead of LSAP). The goal of this action: make the 2s10s will go vertical and to pancake the 10s30s:"
Thanks a lot
I second this question.
OT 2 is nothing more than the Fed doing all it can to steepen the 2s10s (far steeper compared to where it is now), and to flatten the 10s30s (that may or may not involve buying the 30s). There is no selling of the 2 Year courtesy of ZIPR through 2013 which means the 2 Year will be 0.00%. The fulcrum security is the 10 Year. Since the Butterfly has historically been double where it is now, the Fed will have a lot of the 10 Years to sell to return us to this formation.
i sent you mail fucker!
<------ if you are unable to mind your own fucking business.
To bring this down to tard level (where I'm at), essentially the 10 year is going to get juiced? Ie., if you believe this is going to occur, one would be bullish the 10 year futures?
Forgive me for being dense possibly, but reading Rosies post you just tweeted from May, it sounds like his version of OT2 would be to pin the 10 year at a low yield, and the only way to steepen the 2s10 would be to widen out the 10yr. How does steepening the 2s10 help risk assets?
Steepening 2s10s sends fins surging: remember net interest income? Fins have to be leadership group again, and with 25% short interest this group could explode higher (however briefly). As for Rosie, back in May the 2s10s30s was double where it was now. Courtesy of all the panic buying of USTs, the Fed can now sell the 10 Year to get to where Rosie wanted to get to from the perspective of May 30! And in doing so it will push out everyone who is long the curve into stocks and other assets.
Once again, this entire move is limited by the amount of call options the Fed can sell on the 10 Y+ and/or how much long-dated debt is held in the SOMA.
and what, if anything does this do to China's UST holdings?
if it flattens 10s30s do they dump?
I think that stock markets are betting on QE Classic, not this low calorie QE Lite Twist nonsense that won't even help the bulls put on fat. Even QE Classic wouldn't matter very much, and they're not going to get QE Classic from Jackson Hole. They're likely to get it later, not now.
You're welcome to check out my new blog: http://how-to-trade-armageddon.com/
First article is titled Fight the Fed: http://how-to-trade-armageddon.com/2011/08/24/fight-the-fed/
The gist is, don't be intimidated by this Bernanke Put rally, the bulls don't have a leg to stand on. Let's go eat 'em!
Okay, Imma take a stab at this. So the Fed unloads all the T30 it holds and that crushes their value on the open market. Nobody has any incentive to hold anything long (cuz yields are in the toilet, unreflective of risk). Large scale sell off on the long end. Am I right so far?
And the other side of the coin is the US freezing rates on the low end bond, right? Where did I hear that one?
So all this is pushing $$ out of bonds and back into stox? And the velocity of money goes up as a result?
If that's the story then it looks fishy to me.
So the fed will short bonds via TBT? I consider it doubtful. Stocks are rising because the short bus thinks QE3 is in the bag. The Bernank will wait for rates to rise before announcing QE3 so there may be some short-term disappointment.
Klaatu Barada Nikto.
Don't you have to say that twice.
Heghlu'meH QaQ jajvam said the bernank.
<----- if you like to suck cock.
http://www.youtube.com/watch?v=MvK5qxgETCg&list=FLbRZZAixeFXZfqszvKisEdQ&index=1
Uploaded by DoomBoomGloom on Aug 23, 2011
Go to http://marcfaberchannel.blogspot.com for details
Carol Massar and Matt Miller talk to Marc Faber Bloomberg TVs
QE-3 Started Already when the FED said low or 0% interest for the next couple (or more) years.. people can buy 10 Year Treasuries with 0% short term monies!
From BB upcoming speech - snark
Modigliani and Sutch argued that, if Operation Twist did
contribute to a narrowing in the spread, it was unlikely to have
exceeded 0.1 or 0.2 percentage points—a modest reduction at
best. As they also point out, it is common for the spread to
narrow as the economy recovers. (The trough of the business
cycle was in February 1961; its subsequent peak was in
December 1969.)
From this episode, many policymakers and analysts
should have recognized, according to Benjamin H. Beckhart, that
"long-term interest rates cannot be substantially reduced by
money market gimmicks." It is doubtful, therefore, that the Fed
would be more successful today than it was 30 years ago in
attempting to twist the yield curve. Indeed, now that interest rate
ceilings on deposit accounts are no longer in effect, there are no
artificial forces holding these rates at any particular level.
What's more, if expectations have a role in determining longterm
interest rates, then the interest rate spread includes an
inflation component that will not disappear simply because fewer
long-term bonds are circulating in the market. As long as the
swapping operation leaves inflationary expectations unchanged,
no lasting narrowing of the interest rates spread can occur. In
Beckhart’s words, “A lasting decline will be achieved only if
people gain confidence in the long-term purchasing power of the
dollar.”
http://research.stlouisfed.org/econ/zaretsky/bold.pdf
Good day for anyone playing the compression between gld and TBT that Tyler alluded to the other day . . . .
from a pure political driven though, obummer needs deflation to appease wage earners so that their real wages will rise. Im willing to bet hind to horses there will be NO type of QE3 or lite for that matter. I mean the bond market will do the feds work for them, as investors will rush into treasuries driving yeilds down. as a recession is priced in.....Anyone that has thoughts on this, please comment.
Freeze dried food *****es! You still can't grasp this means war on US soil soon!
Question for the group, how long does it take for FAZ to start having serious decay? What is the max hold time before it gets bad? Thanks in advance.
exactly 1 day like today
market will rally no matter what bernake says
bernake s mere appearnce on tv causes people to buy. he will save us all
True - for any soul that is still left in this schizophrenic market trading..
Tyler, do you want to tell me that this sell-off has nothing to do with option expiry and the huge OTC short position on gold and silver some banks hold?
I thought operation twist would require the Fed buying, not selling, everything 10 Year and older...
Isn't the objective to bring down the rates at the long end of the curve?
Check out all the suckers taking the BAC bait CNBC threw out yesterday when they started their blogger conspiracy attack. Just goes to show you that the only thing left in these markets is a bunch of Chesters running around trying to get Spike a bone.. With all due respect, I will have to say there is still one credible anchor at CNBC that actually called it right a few years back and took a lot of heat in doing so..And no Dennis it's not you so don't even bother clicking the link...
http://www.youtube.com/watch?v=j0hfbdAUx1Q&playnext=1&list=PL741FA1B31083F49D
Why should Bernanke QE3 (Twist or whatever)if stocks have been rallying?
The Dow is currently around 11,300, the last top was around 12,800.
There's no way he will QE3 until he HAS to and, to me, that means sub 10,000 Dow or sub 1040 (ah yes, remember that support in 20010?).
DavidC
They could also throw out that they're using the short term treasuries maturities to purchase the long end. They've already indicated they're doing that to some extent and QE Lite was that. Changing the weighted average duration may just as well be the language.
They've shot this wad to a certain extent.
I don't expect they'd say this, but they still have the derivatives issue too. Twist is really about making sure Interest Rate Swaps expire worthless. They could always assume the risk on their books. They essentially are, but the difference is whether it appears a risk mangers' book at the banks or not.
Gold's move is primarily related to furtures expiration. You can make nice money every month by buying GLD puts 3 or 4 days before futures expirtaion. They almost always (9 times out of 10) hammer gold into expiration - which happens to be tomorrow. Buy at the close tomorrow.
Need some HELP here. In QEII, the Fed LOANED $ to the Primary Dealers who then bought bonds from the Treasury with that money. The PDs then transferred the bonds to the Fed in repayment of the loan.....right? IF that is right, how are the non-borrowed reserve accounts of the PD and commercial banks getting so large. I understand that the Fed (in this scenario) is now holding a ton of Treasuries that they paid for with money printing, but how does this translate to the huge NBRs?
Thanx in advance for helping clear this up.
So BTFD in gold after the Bernanke announces this? Too late. I already started.
Timing be damned. The end result will be obvious enough.
You're better at synthetic vocabulary existentialism than a sanitational engineering confabulator.
Oh wait. That's actually the most concise way to communicate facts about this ridiculous Washington
Monument of Lies they've created.
Hope that crack grows fast.
You're misunderestimating his connotations.
Forsake order; embrace Chaosiness.
Looks like it found it's bottom to me.
The Benbernak will speak in clear, precise English Language, yet nobody will understand a f**king word he says until Tepper Tantrum 2 decodes it all on CNBC.
maybe is a stupid idea but i think that we will get a real QE from jackson hole....but not on friday and not from the fed.
on saturday trichet will speak at 10.25am. i think he will announce the official european QE. now EU has a bigger problem then in the US and the world economy can't afford two QE programs ( ..one qe is too much ..) . in the next period the EU will print money...
Durden - excellent cheater analysis. I'm moving on this pre-"the bernankster" Fri Jackson Hole shit-spew. You are the best. Thanks.
Where's Graham Summers when you need him, oh yes, shorting gold at the bottom...
Never waste an opportunity to create a crisis.