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    Fed Unlikely Attempts Operation Twist| Influencer‘s Insight •Jasper Lo

    Abstract:Global long-term bond yields have been extending their gains, with the US 10-Year Treasury yield at one point hiking to 1.61%. As a result, global stock markets staged corrections to different degrees amid concerns over the Fed’s earlier tightening of monetary policy. The costs of financial institutions and corporate finance exploded in this case, hitting the economies struggling to recover.
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      Global long-term bond yields have been extending their gains, with the US 10-Year Treasury yield at one point hiking to 1.61%. As a result, global stock markets staged corrections to different degrees amid concerns over the Feds earlier tightening of monetary policy. The costs of financial institutions and corporate finance exploded in this case, hitting the economies struggling to recover.

      Financial markets are betting on the Fed‘s intervention in the face of the soaring US 10-Year Treasury yield. They believe the bank won’t just sit by and watch the financial market and the economy adversely affected. Thus some analysts predicted that the Fed would soon launch Operation Twist (OT) to mitigate the pressure from the spiking long-term bond yields.

      

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      Operation Twist occurs whenever the Fed uses the proceeds of its sales from short-term Treasury bills to buy long-term Treasury notes. By buying long-term notes in bulk, it puts a premium on bond prices, pushing a fall in interest rates which reduces the cost of borrowing for businesses. At the same time, it takes off some pressure of tightening monetary policy on the Fed.

      The last time the Fed attempted the OT was in September 2011, in response to the Eurozone debt crisis and the aftermath of the financial tsunami. At this stage, the bank is unlikely to launch a large twist because the current correction in the financial market is not deep enough.

      In future trading, the 10-Year Treasury yield is expected to regain the upward momentum after temporary consolidation, with the high of 1.97% recorded in November 2019 the general target. The uptrend, however, will hamper the Japanese yen, Swiss franc, euro and gold, but boost the DXY, which has a great chance to stand at 91.60 or even above.

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