Operation Twist II: Classic or Housing?

After the Fed, the curve of treasuries closed flattened to levels not seen since almost three years. An important point to consider is that in september 20 the Fed announced that would keep the rate for a extended period to 2013 without changes, and also the announced the program so called operation twist, which consist in selling the assets with three year or less and buying bonds with durations of 6 or more years wich owns under the SOMA program (System open market accounts). The intention was one more time is to make flatter the curve of bonds specialy the long end, to promote the U.S. economy without new money but increase the duration of the SOMA fund.

Why is this important? because the Fed could and i think will make another round of easing. In the Fed´s announcement of january 25, they extended the period of low rates for one more year through 2014, so in this way, i think they eased the road to another operation twist but in this time of mortgages maybe or extend the duration for one year of the selling in a renewed operation twist. They could sell, as he does, the front end of the curve, and buy mortgages or a mix of mortgages and bonds of medium and long duration. Why do the Fed need another year of low rates? because they assure demand of the front end of bonds in the auctions they will make, and maybe sell assets of durations of five or less years of duration. It´s important assure this demand because the front of the curve is in extreme low rates situation.

The difference between the classic Quantitative Easing (QE) and the operation Twist is that with the operation twist, there isn´t pumping of new money in the system, just an increased, not without risk for the SOMA, of duration in the SOMA fund. In the past the Fed preferred this way because of the critics to the QE for pumping money in the system by buying bonds with the increased risk of inflation. Still there are critics to the QE as a proper way to promote growth in the economy. With the operation twist of mortgages they could focus in the promotion of growth in the housing.