Pay Attention To 10-Year Treasuries

The Federal Reserve announced on Wednesday ([1], [2]) that it will sell some of its shorter-term assets in order to buy more longer-term assets. Here I assess some of the possible consequences of this move.

Investing errors come in all shapes and sizes. Some mistakes are timeless, such as not investing at all, while others are specific to events and circumstances. For instance, economic and investing conditions over the past few years represent something of an extraordinary time, beginning with the stock market plunge in 2008.

By Tim Shaw:Back in September of 2011 the Fed chairman Ben Bernanke announced Operation Twist, which I wrote about here. Wednesday the Fed announced a continuation of the same program and that interest rates will remain low through 2014. The continuation program of selling shorter term treasuries and buying longer dated treasuries are an attempt to keep bond yields low.

By Doug Short: Note from dshort: With yesterday's selloff in equities, the flight to safety (and accompanying decline in yields) was no doubt driven by the fear of Eurozone contagion rather than the Fed's Operation Twist.

On September 21, 2011 in a Federal Reserve Press Release the Fed announced "Operation Twist" purportedly to drive down long-term rates and drive up short-term rates.

By Doug Short: Note from dshort: With Thursday's selloff in equities, the flight to safety (and accompanying decline in yields) was again driven by the fear of eurozone contagion.

In today’s zero interest rate environment, income investors are running out of options.  Yields on treasuries have been compressed to historic lows.  Bank CDs and deposit accounts aren’t generating enough income to cover account maintenance costs.  And equity positions that pay dividends are becoming more risky as the economy stumbles.