The Federal Reserve announced June 20 that it will extend its program of selling short-term Treasuries and buying long-term Treasuries, effectively extending ‘Operation Twist’ beyond its scheduled expiration at the end of this month. From the McClatchy Newspapers report:
Because of the deteriorating conditions, the Fed said, benchmark interest rates are likely to remain near zero through at least late 2014. And a program set to expire this month, where the Fed swapped out $400 billion in short-term bonds for bonds of longer duration, will continue through the end of the year.
The Fed did not indicate the size of the swap for the rest of the year, but said it would trade out bonds with maturities of three years or less for those with maturities of six years to 30 years.
The expected result would be for Treasury values to strengthen, but the market for Treasury Inflation-Protected Securities, already at record-high prices (and low yields), has responded with a ‘ho-hum.’
Here’s a chart comparing prices over the last five days for TIP (the TIPS ETF) and TLT (the long-term Treasury ETF, shown in red in the chart):
So far, Operation Twist is doing little to support the very-lofty values for TIPS.
However, the Fed’s commitment to holding short-term interest rates very close to zero through 2014 will provide support for TIPS because yields on traditional Treasuries will remain very low. If break-even rates remain around 2.0%, TIPS will continue to provide negative yields to inflation for many more months.