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The Truth About Twist

When next the Fed meets on June 19 and 20 of this week, one of the items on the agenda will be the continuation and/or expansion of their "twist" program.  So what is twist, and why are they doing it?   Twist is a program by which the Fed buys long dated treasuries and sells short dated treasuries.  If they buy from the open market and sell from their current holdings, twist is, on the face of it, balance sheet neutral (meaning the Fed is not increasing its balance sheet to do it) and therefore not additionally inflationary.  It is what is commonly referred to as a "sanitized"operation.  The publicly stated purpose for engaging in operation twist is to affect interest rate reductions, particularly in the ten year treasury rate (from which all mortgage interest rates are derived). This is critical to a recovery in housing as low interest rates, particularly when ARMs are involved, allow housing to be more affordable.

The other benefit, not talked about in the media, is that Project Twist, when combined with additional treasury purchases results in the Fed owning the long dated maturities and the foreigners and the public owning the short dated treasuries, which is exactly what you want when you are getting ready to rapidly inflate away your debt. 

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