Even though stocks dropped immediately after the Federal Reserve’s “Operation Twist” announcement on Wednesday, analysts said the Fed’s move means investment opportunities in the world of fixed income, both in corporate bonds and Treasuries themselves.
Investment strategists say the Federal Reserve policymakers’ announced goal of bending the Treasury yield curve in order to keep interest rates low and encourage growth opens up some new possibilities, even if it does look like the Federal Open Market Committee (FOMC) has run out of options in its monetary-policy toolbox.
In its Operation Twist announcement, the FOMC specified that by the end of June 2012, the Fed intends to purchase $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. The Fed also will now reinvest principal payments from its holdings of agency debt and mortgage-backed securities back into agency mortgage-backed securities.
What does this easy-monetary policy move mean for bond investors? Here’s a roundup of what the strategists are saying:
Doug Roberts, chief investment strategist for ChannelCapitalResearch.com, Shrewsbury, N.J.: “The fear of holding any risky assets…has resulted in a flow of funds into Treasury securities. The supply of U.S. dollars is controlled by the Federal Reserve, which can print U.S. dollars at will to satisfy its debt obligations and maintain low interest rates. The value of the U.S. dollar might suffer considerably, and there could be substantial inflation. This may be linked to the current rise in gold prices.