Has Operation Twist Played Out Already? Time to Short Bonds?

by Mike Shedlock

Curve Watchers Anonymous notes a reversal in US treasury yields today, with the yield on the long end of the yield curve rising sharply as show below.



Has Operation Twist Played Out Already?

Recall that the Fed's goal in "Operation Twist" (selling the short end of the curve and buying the long end) was supposed to drive down long term rates.

Yield Curve as of 2011-09-23



Time to Short Bonds?

Today, yields on the long end of the curve rose, as shown above. Inquiring minds may be wondering if it's time to short bonds.

The short-answer is "No it's not, but that does not mean buy them either".

30-Year bonds are now approaching all-time lows. Should that happen, and I now expect it to (that is a reversal for me), the bond-bull market never ended no matter what duration you measure the bull market by.

However, much of this trade was front-run. Nearly everyone assumed the Fed would announce Operation Twist, so now we are in a potential "sell the news" situation. If so, it may have started today.

However, the global economy is fading fast. That is supportive of more government bond purchases as a safe haven.

I see no edge to buying or shorting the long end of the US treasury curve here. Sometimes the best thing to do is nothing. To be sure, bond bears have been taken out to the cleaners and I warned about that in advance.

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