What Is Operation Twist?

The so-called distortion operation is to sell short-term government bonds and buy longer-term government bonds, thereby extending the overall maturity of the government bond assets held. Such operations will reduce the long-term government bond yield. From the perspective of the yield curve, this operation is equivalent to bending the far end of the curve downward, which is why the twist operation is named. In 1961, the US Federal Reserve implemented twisting operations for the first time. In September 2011, the US Federal Reserve adopted a twist operation for the second time. ^{[1] The} twist operation was named after a popular song The Twist (sung by Chubby Checker) and the popular Twist Dance. The twist operation was designed by American economist James Tobin in early 1960. ^[2]

Twist operation

The twist operation was subsequently adopted for the first time by the Federal Reserve in 1961. At that time, the Fed purchased long-term US Treasury bonds of 4 billion U.S. dollars and mainly sold short-term bonds. In addition to reducing long-term interest rates, it also hoped to reduce the loss of U.S. gold reserves, but the effect was not great that year. ^[2]

On August 2, 2013, the People's Bank of China in the "Report on the Implementation of China's Monetary Policy in the Second Quarter of 2013" ^[11] proposed the use of innovative monetary policy operations while freezing long-term liquidity and providing short-term liquidity in the open market . This method of operation has been widely cited by the market as "locking the long and shortening the short", that is, tightening long-term liquidity through a three-year maturity central bill that expires, and releasing short-term liquidity through open market operations and standing loan facilities (SLF) In order to achieve the purpose of limiting the maturity mismatch of financial institutions and maintaining the smooth operation of the money market. Because this central bank's innovative monetary policy is similar to the distortion operation used by the Federal Reserve before the third round of quantitative easing (QE3), it is also called the Chinese version of distortion operation. ^[8]

Although the official did not explain this "Chinese-style distortion operation", in fact, the central bank's open market operations since late July have clearly demonstrated this intention. Judging from the reverse repurchase restarted on August 1, 2013, most of the scale hovered at a low level between 10 billion and 40 billion yuan. Although interest rates have been falling successively, they are almost all higher than market rates, and the signals given are still tight. On August 1, 2013, the 10-year Treasury bond won the bid rate of 4.08%, which climbed above 4.0% for the first time since June 20, 2008. It is iconic and shows the initial results of the distortion operation. ^[12]