Euro-Sensitivity and Operation Twist
In the spirit of love thy neighbor and vampire diaries, The Bernanke is opening a vein and letting Europe suck from it while they deal with the Greece, Spain and Italy situations. He’s doing this by manipulating the bond market with Operation Twist.
If you recall, Operation Twist is a Fed program where they sell short bonds in their inventory, and use the proceeds to purchase long bonds. Short bonds are the Two year and Five year Notes, And Long bonds are the Ten year and 30 Year bonds. This re-allocation of monies has the effect of bringing down long term interest rates.
The Twist is supposed to help the world economies in two ways. The first way helps long term rates on things like mortgages and other long-term debt that businesses use. The second way is it strengthens the US dollar, thereby weakening the Euro-dollar, which helps Europe manage their debt while things are so tentative. This is the blood letting I was referring to.
The Twist doesn’t come without side effects. Every time the Fed goes on one of these sell-buy binges it effects the markets, dramatically. And one of the bigger problems is trying to regulate interest rates and the ensuing lack of demand it causes for long bonds. And what that means is… if long term rates are reduced too much, other nations and traders won’t be so inclined to purchase our long bonds, and we need that revenue desperately because of our own self-imposed fiscal crisis.
So basically, the Fed trying to lift the whole world at the expense of our own markets. This makes it difficult for traders to trade futures and stocks, because they have to guess each day which bond the Fed be buying or selling on which day, cuz the Fed don’t publish a schedule… only if.
Economic reports this morning were mixed, with Jobless claims coming in under what they expected, but just slightly. So that’s good. But durable goods orders were worse than expected, although better than last month. However the slide to the downside continues. The market has reacted in a nuetral fashion to these numbers, and that’s Ok, because normally we would have dropped sharply on these numbers and the dollar would spike up… but it didn’t… that’s the power of coming off the bottom.
So, barring Europe doing anything stupid, we should have a good day. I’m predicting an up day, but choppy. It’s gonna be choppy because volume is going to drop off big time between today and tomorrow, with all those big financiers and floor traders heading towards the Hampton’s to open up their summer homes for Memorial Day weekend.
That is all!
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