The program known as Operation Twist may lower the Treasury 10-year note yield by about 85 basis points, or 0.85 percentage point, compared with a reduction of 164 basis points under the Fed’s $2.3 trillion purchases of assets known as quantitative easing, a report from the Basel, Switzerland-based BIS said.
Operation Twist “may have a significant impact on the 10- year Treasury bond yield, comparable to that of outright asset purchases,” Jack Meaning, an economics doctoral candidate at the University of Kent, and Feng Zhu, a BIS economist, wrote in the report, which was released today.
They said part of Operation Twist’s reduction of yields may be erased by the Treasury Department, which has increased its average debt maturity to 62.8 months, the highest level since 2002. The U.S. government’s increase in the average maturity of outstanding debt added 41 basis points to the 10-year note yield, Meaning and Zhu wrote.
The Treasury moved to cut back on its issuance of bills and two- and three-year notes as the financial crisis eased after boosting short-term borrowing to contain the worst financial crisis since the Great Depression.
Operation Twist
The central bank said in September that it would sell $400 billion of short-term debt in its holdings and buy an equal amount of longer-maturity Treasuries. The program is known as Operation Twist after a similar effort in 1961 to contain borrowing costs for companies and consumers. The Fed remains the top holder of U.S. government debt, with $1.66 trillion on its balance sheet.
Increasing the maturity of the Fed’s holdings by one month drives 10-year yields down by about 3.4 basis points, the BIS report said. Treasuries due in 10 years yielded 2.05 percent on March 9, compared with a high last year of 3.74 percent on a closing basis. U.S. government debt maturing in 30 years yielded 3.20 percent, having decreased from 4.77 percent.
“Operation Twist has been successful,” Dan Orlando, managing director and head of U.S. government trading at Deutsche Bank AG in New York, said in a March 8 interview. “They’ve been able to drive investors into other asset classes.”
Marketable Debt
The government has $10.2 trillion of marketable debt outstanding, data compiled by Bloomberg show. The amount has climbed from $4.5 trillion in January 2008 before the outbreak of the financial crisis.
“The average maturity of U.S. federal government debt is on the low side among developed-market sovereigns,” John Chambers, managing director of sovereign ratings at Standard & Poor’s, wrote March 9 in an e-mail message. New York-based S&P lowered the U.S. rating to AA+ in August.
Moody’s Investors Service and Fitch Ratings assign the U.S. their top grades with a negative outlook.
“We view the U.S. as being somewhat exceptional in not having as much vulnerability as other governments do to refinancing risk, no matter what the maturity is, because of the status of the Treasury market as the benchmark of the global markets,” Steven Hess, senior credit officer at Moody’s, said March 8 in an interview.
To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
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