Thursday, September 29, 2011

Twist and Shout

The Fed recently launched the $400 Billion operation twist. A program, also used in the early 1960's, where the Fed will sell $400B in short-term treasuries and buying an equivalent amount of longer dated bonds. The result is a flattening of the yield curve. The chart below shows how the curve flattened slightly after the fed announcement - with more to come. The Fed is helping homeowners and businesses by lowering long-term borrowing costs to incentivize longer dated asset transactions ( buying a house or building a factory with borrowed money ). However, this program doesn't come free. The net interest margin for banks will be under pressure and insurance companies with long-dated bonds to match their long-dated liabilities will be squeezed. So now what? Well, some argue that with rates already quite low, Twist will have minimal impact.
I agree. I'll sit tight and monitor the results of the financial companies I own, focusing on capital levels to ensure that twist doesn't squeeze too hard. It may take longer for the financials to turn the corner.

source: Bloomberg

I own positions in BAC,WFC,MFC

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