So Far "Operation Twist" Is A Colossal Failure

...except for the Treasury - and for investors clamoring for the short term "safe" paper that the Fed is selling and while the primary dealers (Wall St. banks)  sell back to the Fed the medium/long term paper that primary dealers have to eat in Treasury auctions in order for the Treasury to look like it is having no problem funding the Government's deficits.

Take today, for instance, the Fed auctioned off $8.87 billion in 18 month - 2yr paper that was met with nearly $70 billion in bid interest.  Then the Treasury auctioned off $21 billion 10yr Treasuries in what was one of the poorest quality Treasury auctions in 2 years.  The primary dealers, aka the Fed, had to swallow 58% of the auction.  You see what's going on here?  The Fed is selling short term "safe" paper into huge demand in order to make room on its balance sheet to indirectly monetize Treasury auctions.  This is de facto money printing. 

"OT" is supposed to reduce the yields on the "middle" part of the curve, thereby stimulating business investment and the housing market. In theory. It failed back in the early 1960's when it was tried the first time.  Let's take a look at what the market thinks of "Operation Twist."  When the Fed announced the new monetary operation on Sept 21.  Here's a "then and now" list of what the Treasury yield curve looked like:

                                                            9/21                        Today

                                    5-yr                .85%                         1.18%
                                    7-yr              1.27%                         1.74%
                                 10-yr               1.80%                         2.25%
                                 30-yr               2.85%                         3.25%

Hmmm....either the Fed's policy is a dismally brutal failure or all of a sudden the bond market decided that we might get some inflation.   Since the bond market has egregiously mispriced the true rate of inflation for the better part of the last 10 years, I would say the odds are greatly skewed toward the view that once again the Fed's trying to use monetary gimmicks to tinker with nature is appallingly flawed.

But let's call this "new" policy idea what it is.  Circle back to what we know about the Fed's operation since December 2010, when QE2 was announced.  We know that indirectly, via open market purchase operations, the Fed basically financed 100% of all new Treasury debt issuance.  Hell, Bernanke didn't even wait for the ink to dry on the bond indentures of some of the auctions, as Treasury CUSIPS not even a week old would show up on the Fed's subsequent weekly Treasury purchase operations (POMO).

So this Operation Twist, is really just another disguised form of the Fed shifting paper around on its balance sheet to take advantage of the surreal demand for short term "safe" paper in order to create the funds needed to make sure that the Obama Government can fund its operations.  Nifty footwork if you ask me, but quite obvious to the naked eye if you know where to look for the truth.

Hang onto to your gold and silver, because even if you ended up buying into the market at the recent top in September, I believe that a year from now you may have doubled your money from that point of investment.  It's been that pattern for the last 10 years and the fundamentals and technicals supporting the continuance of that pattern get stronger by the day.