Operation Twist

Posted in Finance, Accounting and Economics Terms, Total Reads: 66

Definition: Operation Twist

Operation Twist is the monetary policy adopted by Federal Reserve of United States in which it sells short term government bonds and buys long terms bonds to bring the long term interest rate down in order to stimulate the economy.

Operation Twist is one of the many other monetary easing policies adopted by central banks. By buying the long term bonds Fed tries to drive the prices up and in turn yields down. Similarly by selling the short term bonds the Fed tries to drive the prices down and in turn the yields up. Hence by creating this combination the Fed is able to twist the yields curve on long term and short term bonds. And it is able to ease out the economy by lowering the long term interest rate. What actually happens in the process is that through buying long term bonds and selling short term bonds, the demand for the long term bonds increases than the supply, which drives up the prices of these bonds and yield move down and vice versa in case of short term bonds.

For Example: In 2011, the Fed started to purchase long term bonds and sell short dated bonds. Through this program the long term interest rates came down. Hence a monetary easing was in place.



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