Thursday, 22 September 2011

Twist and shout

The yanks have a cunning plan. It's called Operation Twist. They will sell $400bn worth of short-term gilts and use the money to buy the same value in long-term bonds.

The thing to remember about bonds is the yield goes up when the price comes down, and vice-versa. So when they buy the long-term bonds this will cause a price increase, hence a yield fall.

So what they are going is making long-term interest rates lower, at the cost of making short-term interest rates higher. Apparently short-term money is plenty cheap enough, but they want firms to have access to some long-term cheap money because investing in growth is a long-term thing.

I suppose it will work, a bit.

Of course when the short-term bonds they've sold mature they'll have to sell the long-term bonds to fund redeeming them and the whole operation will reverse itself. But at least it's cash neutral and so not inflationary.

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