We Owe Our New Debt to the Fed

'Operation Twist' likely a prelude to QE3

   

investorpoliticsletters2 We Owe Our New Debt to the FedOne of the excuses we often hear about our federal debt is that “we owe it to ourselves,” meaning our $15.4 trillion in debt really isn’t so bad since interest checks are sent to individuals, pension accounts and other private holders of U.S. Treasury bonds. But that’s no longer true.

We owe our new debt to the Fed!

On Friday, The Wall Street Journal reported the Fed’s Operation Twist has overpowered the most recent long-term Treasury bond auctions. According to the Journal, data compiled by Barclays Capital shows that since Operation Twist began in October, the Fed has bought $50.3 billion in new Treasury bonds maturing in 20 to 30 years, accounting for a whopping 91% of new long-term Treasury bonds.

This trend makes it clear that the Fed has been manipulating the long end of the yield curve. As a result of these shocking statistics, it is becoming increasingly apparent that after Operation Twist ends, the Fed might have to implement a third round of quantitative easing to prevent Treasury bond yields from soaring.

Last Wednesday, San Francisco Fed President John Williams gave a speech in San Ramon, Calif., in which he implied the Fed was ready to do a third round of quantitative easing if the current economic recovery faltered. Williams is one of the “doves” that now dominate the Federal Open Market Committee, which has been flattening the yield curve and keeping key interest rates near 0%.

It is clear investors are so frustrated with low interest rates, which the Fed has promised to maintain at near 0% through 2014, that the stock market has been “melting up” on persistent order imbalances. This makes me optimistic we will likely continue to see a strong stock market in upcoming weeks.

The opinions contained in this column are solely those of the writer.

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