After two-day Federal Open Market Committee (FOMC) meeting from 20-21 September, FOMC announced that it will sell short maturity (three-years or less) securities to purchase USD 400 billion of longer-dated Treasuries (6 years to 30 years) by the end of June 2012. This is known as “Operation Twist”
Technically, Operation Twist is the sale of front-end securities and using the proceeds to buy longer-dated maturities, the aim of which is to make higher-yielding alternatives more attractive, and to reduce market volatility through removing duration.
In a formal statement, the Fed explained: “By reducing the supply of longer-term Treasury securities in the market, this action should put downward pressure on longer-term interest rates, including rates on financial assets that investors consider to be close substitutes for longer-term Treasury securities.
“The reduction in longer-term interest rates, in turn, will contribute to a broad easing in financial market conditions that will provide additional stimulus to support the economic recovery.”
The bonds’ purchase and subsequent sale does not put any new money into the economy but is designed to encourage low interest rates to boost business borrowing for companies and mortgage lending for individuals.
Unfortunately, the markets seem to react quite negatively to the policy, which is supposed to stimulate the economy. Asian stocks fell, driving a regional benchmark index toward its largest weekly loss since 2008.
If you follow my blog, since early this month, I’ve cautioned investors to be careful about the downside risk of Singapore currency due to all these uncertainties in the markets, USD has risen above 1.3 against SGD in just a couple of weeks since! However, investors should always remember, what goes up will come down, and vice versa.