Operation Twist - kan Feds nya stimulanspaket ge USA en kick-start?

What is ‘operation twist’?

• The Fed now owns $1.65 billion of US government bonds after two rounds of quantitative easing, when it bought more US debt to inject liquidity into the economy
• But the US economy is stalling and the Fed is not yet planning more asset purchases which would expand its balance sheet
• The bonds it already owns will mature at different times – between one and 30 years
• The Fed plans to sell some of its short-dated bonds in order to buy longer-dated issues. This will be a net stimulus to the economy and support financial markets, without expanding the Fed’s balance sheet
• It’s hoped that operation twist will depress the yields on longer-dated bonds, in theory flattening the yield curve – 30% of the purchases will be in the 20- to 30-year range
• The Fed wants to encourage banks to make longer-term loans, such as mortgages to home buyers and loans for small businesses
• The Federal Open Market Committee (they set interest rates and control money supply growth) made a statement that further unorthodox stimulus is also under consideration

Implications for US housing

In addition to ‘Operation Twist’, the Fed surprised markets by saying it will reinvest the payments from the maturing mortgage backed securities it owns back into similar securities to support the mortgage market

•  The Fed’s intention here is to boost the housing sector and, in turn, the broader economy
• The Fed recognises that a modest decline in house prices can be self-reinforcing; house prices fall àdelinquency rates rise à banks lend less à the supply of buyers declines à the number of foreclosures remains high à new construction (a key engine for employment) falls
• It’s the bigger picture that is worrying markets: the eurozone debt crisis, the possibility of a US recession and hard landing in China – the Fed’s latest action won’t provide  a solution to these issues. It is not a game-changer.

Implications for investors

• This latest action from the Fed offers mores support to bonds than equities. Bond investors need to remain flexible, which is best done via a strategic approach to bond investing that has the ability to tailor bond allocation to changing conditions
• The diversification benefits offered by multi-asset investing should serve investors well, whilst smart tactical decisions can help to protect investors’ capital.
• Equity investors should not panic given a very gloomy outlook has already been significantly priced into shares. Indeed,  there is value to be found if patient investors are willing to stomach a little short-term volatility and take a long-term view. Allocating to high-quality, high-yielding shares (and avoiding value traps) could help weather the current storm and deliver good total returns. Equity yields are now extremely attractive.

“The Fed opted not to expand the size of its balance sheet, preferring to extend the duration of the Treasuries it holds significantly and to reinvest proceeds from maturing mortgage-backed securities in similar issues to keeping mortgage rates low. The announcement seems more positive for bonds than stocks. It may take evidence of a deeper economic slowdown and a fall in commodity prices for the Fed act with greater force."
Trevor Greetham, Multi Asset Funds

“These two stimulus packages do little to change my view point that the US economy is still in an economic quagmire and remains heavily indebted; households are continuing to reduce their debt levels and therefore, will be unable to step in and assist with the economic recovery anytime soon. One sector that I continue to find value in is the short-dated, high quality corporate bond sector. These entities continue to hold sizeable amounts of cash and liquidity on their balance sheets. On the short dated part of the US curve, I believe that a move out of short-dated treasuries into highly rated short-dated corporate bonds, in order to benefit from a higher yield pickup, continues to be a good strategy. “
Rick Patel, US Fixed Income

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