Operation Twist 1.0 was a stroke of pure (evil) genius by Ben Bernanke 15 years ago, and two modern day Wizards may be trying to engineer something similar today
“Sanitize” Baby, “Sanitize!”
In 2011 former Fed bond market manipulator Ben Bernanke painted inflation expectations right out of the macro with Operation Twist and its officially stated objective to “sanitize” inflation. A “twist” is done by rigging long-term bond yields lower and short-term yields higher. Or at least rigging short-term yields stronger than long-term yields on a relative basis.
The implication is that policymakers are on the job, watchful hawks on inflation while the long end of the bond market is painted to not be concerned about inflation. That’s a good one! But still, in market management it’s reality over ideals and justice, folks.
In Bernanke’s case, the operation worked. Fabulously so. Gold, silver and commodities got shot out of the sky like clay pigeons and shoved into a terrible bear market. Hence, Bernanke burnished my view of him: Evil Genius, considering this came well after his heroics during Armageddon ’08 and during his 7 year blight known as Zero Interest Rate Policy (ZIRP).
But that Hero had a completely different bond market to work with than our heroes of today.
Yet still, in my opinion of course, they are trying. While Bessent prepares to engineer long bond yields downward…
…Warsh is doing his part supporting the short end.
I don’t believe for a minute that Bessent’s move would pressure Warsh’s Fed. No, I believe that two pretty big brains got together ahead of time and did some logical expectations engineering. Of course, with half the public barely knowing the difference between a stock and a bond, they stand no chance of looking beyond the surface level that our two monetary wizards would like them to see.
The bottom line is that if the above intentions actually play out, the logical implication is a flattening yield curve, or at least an interruption in the steepener that began in June.
As you can see by the August pullback, that interruption is already in play, but as yet this is just a normal setback in the 10/2yr yield curve at the hands of two monetary wizards working the bond market from both ends.
When considering the dangerous message of 30yr yield (former) Continuum chart above, I think there’s little chance that such tactics work much beyond Bessent’s stated time frame goal (November 4th) into the elections. Given the still-intact steepener, it may not even work beyond today, Friday, the day Warsh kicked in the other half of the operation. *
But in theory, the aim is to do in microcosm what the Bernanke operation began 15 years ago. A phase of Goldilocks macro signaling, “just right” for the economy at a politically sensitive time in our history. She’ll be chased out of the kitchen sooner or later. But for the moment, the operation should be respected by market participants for what it is.
* Again, my opinion, which I guess I have to state.
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