Let`s Twist again : an empirical study of Operation Twist - and the Maturity Extension programs effect on the 10-year Treasury yield in 1961 and 2011-2012

摘要

This report investigates whether Operation Twist (1961) and the Maturity Extension Program (MEP) (2011-2012), has induced a decline in the 10-year Treasury yield. I discuss the economic starting points for the two monetary policies and if the broader objective of economic stimuli is achieved in the American economy today. By estimating-and predicting the 10-year yield I assess whether fundamental conditions in the American economy warrant the level of the10-year yield today-and in 1961. I further review whether the current low level can be explained by other monetary policies-or macroeconomic conditions.My results indicate that MEP might have given a downward pressure on the 10-year Treasury yield. By predicting the 10-year Treasury yield with the variables PMI, inflation, the trade balance, the effective federal funds rate, federal debt held by foreign-and international investors and the St. Louis Financial stress index there still remains, on average, a 55 basis point unexplained spread between the model-predicted yield and actual yield. My results especially indicate that foreign inflow of capital to Treasuries has been an important determinant for the development in the 10-year yield in the last years.I further find a small-and short lived effect of Operation Twist on the 10-year Treasury yield. My conclusions are mainly based on a marginal decline in the actual 10-year yield in 1961, but also because the amount of U.S marketable federal debt held by the public remains roughly unchanged in 1961.Overall I conclude that MEP might have been stimulating for the economy; longer-term yields have declined and there are signs of eased credit conditions. However, Quantitative easing programs in 2008-2010 and continuous forward guidance by the Federal Reserve are factors that most likely have contributed to the current low levels of the longer-term Treasury yields.