This week’s global selling panic that was triggered but the Fed’s worrisome comments, major bank credit downgrades, continued fears of an imminent Greek default and just generally everybody and their dog running for the exit at the same time. Many Fed watchers are shocked at the adverse reaction to the Fed’s $400 billion “Operation Twist,” where it purposely flattens the yield curve via bond swaps, which normally would cause money to flee low yielding investments into stocks.
However, the fact the Fed said after its Federal Open Market Committee meeting that there are “significant downside risks to the economic outlook, including strains in global financial markets” effectively caused Asian and European investors to sell everything, including gold and other commodities. As a result, in the aftermath of the selling capitulation, there could be an incredible buying opportunity at hand.
Long-term Treasury yields are at record lows and the 30-year Treasury bond just had its biggest rally since 2008, resulting in plunging yields and the commensurate price increases of Treasury securities. Operation Twist essentially is expanding the Fed’s “0% interest rate policy” farther out the yield curve. The three-month Treasury bill now yields 0%, the six-month Treasury bill 0.03%, the one-year Treasury note 0.1%, the two-year Treasury note 0.2%, the three-year Treasury note 0.34% and the five-year Treasury bond 0.79%. Eventually, I predict that the Fed will push the five-year Treasury bond yield to 0.5% or less after Operation Twist is over. Read