Daily Reads: Operation Twist Is Twisted, Gross A Treasury Bull?

Fed Operation Twist Tangles Treasuries Trade

LB Take: First, the article. Operation Twist is a strategy / operation of the Federal Reserve to replace the shorter dated Treasury bonds it owns and with longer dated treasuries. This effectively reduces the supply of Treasuries which has two effects: A) it drives up prices of longer dated treasuries and B) it pushes investors that would have bought longer dated treasuries into shorter dated ones, reducing the yield on 10 year Treasury. The fed wants to reduce the yeild on the 10 year because the rates which corporate borrowers and everyone else for that matter pay for loans is based on the 10 year treasury price. The theory is that these lower interest rates will spur economic activity.


Lets get into the details:

Operation Twist involves a lot of money ($400 Billion to be exact) and is scheduled to end this summer. The article suggests that as soon as the program ends, Treasury prices might fall and yields will rise. However, until we start approaching the summer, the major players don’t want to be fighting the FED.

This is the problem with government intervention in the markets. Yes, the government might be able to have an impact, but only in the short-term and often the so called good the government has done will evaporate as soon as it stops intervening. In the end, government intervention creates more market volatility. If I was cynical, I would say there was a trading opportunity.

Gross Raises Total Return’s Holdings of Treasuries To Highest Since July 2010

LB Take: Before I go on my diatribe about how the financial media loves to say “Bill Gross made a big mistake in 2011”, I want to get to the important stuff which the article accidently mentions.

  • 48% of Pimco Total Return portfolio is in Treasuries. More importantly, Bill Gross is staying away from the short-end of the curve (no interest) and the long end of the curve (to much risk if interest rates mover higher).
  • 50% of the portfolio is in MBS securites of which 90% are government agencies. Gross is a bigger fan of Mortgage Back Securities than Treasuries in terms of dollars invested.

However, this is not in the article but in Pimco’s monthly report:

“PIMCO looks to retain Agency mortgages as a source of high quality yield.  While mortgages appear to be fairly valued they may offer favorable risk-adjusted returns relative to other sectors.”

Fairly valued . . they are not so enthusiastic about the upside of their biggest investment?!?!


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