Is Operation Twist Getting a Bad Rap?

Since Operation Twist was announced earlier this month, many have already

as stocks have fallen, volatility has continued to remain extremely high, and the purpose of it (to lower long term rates), is not going to really have much of an impact on the economy, as rates are already at historic lows. That perception however, may be about to change. According to a study by the Federal Reserve Bank of New York and seen by the

Operation Twist may actually be more powerful then many think and are giving it credit for. The Federal Reserve Bank of New York is going to release a report today on the details showing how Operation Twist is going to work. Some private market bond strategists have already done their own assessment, and according to one, it could also boost equities. This is very similar to how the first two rounds of quantitative easing are generally thought to have done. Operation Twist, first enacted back in the 1960's under the Kennedy Administration, is designed to lengthen the maturities on the Fed's balance sheet by selling shorter dated securities, and purchasing longer dated securities. Since Operation Twist was announced on September 21, longer term yields have fallen, but shorter term yields have not moved much, and equities have not reacted positively. The Fed is trying to push investors into riskier assets and take more risk in the economy to help it grow, and it has a somewhat muted impact, although the program has not started yet. The first schedule is going to be announced later today. There is a large group of banks, including Bank of America, Goldman Sachs, Barclays Capital, Credit Suisse, and others who believe that the Fed's program will shrink the Treasury supply, and get money managers to put their money to work in riskier assets. When Goldman Sachs talked about the program, it said it was more aggressive than the bank had expected. "The Fed chose to maintain the interest rate on excess reserves (IOER) at 25bp, contrary to our expectations of a small cut, but overall the details of today's action were more aggressive than expected in two respects: First, a relatively large portion of the purchases will occur at the long end (29% in the 20-30 year maturity bucket), implying a total impact of more than $400bn in 10-year equivalents, versus market expectations of perhaps $300-350bn. Second, the Fed will reinvest maturing and prepaid agency MBS and agency debt in agency MBS, rather than Treasuries, suggesting a bit more support for the housing sector. The statement retained an easing bias, noting again that the FOMC "is prepared to employ its tools" to "promote a stronger economic recovery in a context of price stability," the bank wrote in a research note. That has lead some to start to change their stance on the program. "Operation Twist has greater punch than the QE2 program, or should," said Ray Stone, an economist at Stone & McCarthy Research in quotes captured by the Wall Street Journal. "It will force all money managers to venture into the riskier realm of whatever they're allowed to invest in," said Ward McCarthy, chief financial economist with Jefferies & Co. in comments captured by the Journal. The initial reaction so far to Operation Twist has been muted, and has not really pushed investors into riskier assets. The day the program was announced, equities dropped sharply, and the volatility has continued since then. Just yesterday, we saw a 110 point swing in the NASDAQ. That kind of volatility is not healthy for anyone, traders or investors. It indicates that many do not expect a resolution to the world's problems anytime. Operation Twist is going to last until June 2012, so it is not fair to accurately assess a program that has not started yet. However, we live in a 140 character, ADD world, and we need to see immediate results, or it is not good enough. Perhaps Ben Bernanke really will be able to pull a

He's just waiting for the end of the show to do it.

Traders who believe that Operation Twist will prove more powerful over time than expected might want to consider the following trades:

Traders who believe that Operation Twist is a failure may consider alternate positions: