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Let’s do the Twist

Did the FOMC succeed in lowering long-term rates?

In September 2011, the Federal Reserve’s Open Market Committee (FOMC) announced a “Maturity Extension Program” involving the purchase of $400 billion of longer-term U.S. Treasury securities and liquidation of an equivalent amount of shorter-term securities over a 9-month period. In June 2012, the FOMC extended the program through the end of 2012, a period when the Committee purchased an additional $267 million of longer-term securities and liquidated a similar amount of short-term securities. The purpose of the program was to put downward pressure on longer-term interest rates without increasing the total size of the Fed’s securities portfolio. The program was popularly referred to as “Operation Twist,” reflecting the Committee’s intention to lower long-term interest rates relative to short-term rates and thus twist the yield curve.

The graph illustrates the program’s impact on the maturity composition of the Fed’s portfolio of U.S. Treasury securities. At its inception in September 2011, the portfolio consisted of approximately equal shares of Treasury securities with maturities of 5 years or less and securities with maturities of more than 5 years. When the program ended in December 2012, the shares of short-term and long-term securities in the Fed’s portfolio were about 22 percent and 78 percent, respectively. The Fed began to reverse the Maturity Extension Program in 2013 mainly by buying shorter-term securities as longer-term securities matured. By mid-2015, the Fed held roughly equal amounts of Treasury securities maturing in 5 years or less and longer-term securities. Since then, the Fed has continued to adjust its portfolio toward shorter-term securities, while maintaining a constant total portfolio size.

Did the Maturity Extension Program succeed in twisting the yield curve? As the graph shows, the spread between the yields on 10-year and 3-month Treasury securities fell some 75 basis points during the months when the program was in effect and then rose after the program had concluded. Longer-term yields had also declined by about 75 basis points during the 2 months before the program began, however, perhaps because market participants anticipated the program before it was formally announced. Of course, without formal analysis, it is impossible to say whether the program caused the yield curve to twist, but the behavior of the curve was consistent with the program’s intent.

How this graph was created: Search for “U.S. Treasury securities held by the Federal Reserve” and “All Maturities” should be near the top. From “Edit Graph,” add the matching series for “Maturing within 15 days,” “Maturing in 16 to 90 days,” “Maturing in 91 days to 1 year,” and “Maturing in over 1 year to 5 years” to Line 1. Apply the formula (b+c+d+e)/a. From “Edit Graph,” use the add line feature to search for the “All Maturities” series again and create Line 2. Add to that the matching series for “Maturing in over 5 years to 10 years” and “Maturing in over 10 years.” Apply the formula (b+c)/a. From “Edit Graph,” use the add line feature to add “10-Year Constant Maturity Minus 3-Month Treasury Constant Maturity” as Line 3. Modify the frequency to “Weekly, Ending Wednesday.” Under the “Format” tab, select “Right” for the “Y-Axis position” for Line 3. Finally, click on “10Y” next to the date selection pane to show the last 10 years of data.

Suggested by David Wheelock.

View on FRED, series used in this post: T10Y3M, TREAS10Y, TREAS15, TREAS1590, TREAS1T5, TREAS5T10, TREAS911Y, TREAST

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