Operation Twist 2.0? Bessent and Warsh Work the Yield Curve

By Gary Tanashian, GoldSeek

“Sanitize,” Baby, “Sanitize!”

In 2011, former Fed bond market manipulator Ben Bernanke painted inflation expectations right out of the macro picture with Operation Twist and its officially stated objective to “sanitize” inflation. The name echoes a much earlier episode: the original Operation Twist of 1961, when the Kennedy administration and the Fed sought to lower long-term rates while propping up short-term ones to defend the dollar. A “twist” is carried out by pushing long-term bond yields lower and short-term yields higher — or at least by pushing short-term yields up more strongly than long-term yields on a relative basis. In the 2011 version, the Fed sold short-dated Treasury securities and bought longer-dated ones to reshape the curve.

The implication is that policymakers are on the job, watchful hawks on inflation, while the long end of the bond market is painted to appear unconcerned about inflation. That’s a good one! But in market management, it is reality over ideals and justice, folks. (The Atlantic)

In Bernanke’s case, the operation worked — fabulously so. Gold, silver, and commodities were shot out of the sky like clay pigeons and shoved into a terrible bear market. Hence, Bernanke burnished the author’s view of him as an “Evil Genius,” considering this came well after his heroics during Armageddon ’08 and during his seven-year blight known as Zero Interest Rate Policy (ZIRP).

But that hero had a completely different bond market to work with than the policymakers of today. Yet still, in the author’s opinion, they are trying. While Treasury Secretary Bessent prepares to engineer long bond yields downward (cnbc.com), Warsh is doing his part supporting the short end (Axios).

The stakes in who controls the long end are not cosmetic: long-term Treasury yields anchor mortgage rates and corporate borrowing costs, which is why a Treasury secretary would want them lower heading into an election. The short end, by contrast, is the Fed’s traditional domain, set through the federal funds rate — which is what makes an explicit division of labor between Bessent and Warsh unusual.

The author does not believe for a minute that Bessent’s move would pressure Warsh’s Fed. Rather, the view is that two considerable minds got together ahead of time and did some logical expectations engineering. Of course, with half the public barely knowing the difference between a stock and a bond, they stand no chance of looking beyond the surface level that these two monetary wizards would like them to see.

The bottom line: if the above intentions actually play out, the logical implication is a flattening yield curve — or at least an interruption in the steepener that began in June (cnbc.com). Curve shape matters beyond signaling: bank lending margins have historically been tied to the spread between what banks pay on short-term deposits and earn on longer-term loans.

As shown by the August pullback, that interruption is already in play, but as yet this is just a normal setback in the 10-year/2-year yield curve at the hands of two monetary wizards working the bond market from both ends.

When considering the dangerous message of the 30-year yield “Continuum” chart, the author sees little chance that such tactics work much beyond Bessent’s stated time frame goal of November 4th, into the elections. Given the still-intact steepener, it may not even work beyond Friday — the day Warsh kicked in the other half of the operation.*

But in theory, the aim is to do in microcosm what the Bernanke operation began 15 years ago: a phase of Goldilocks macro signaling, “just right” for the economy at a politically sensitive time in American history. She will be chased out of the kitchen sooner or later. But for the moment, the operation should be respected by market participants for what it is.

From 2011 to 2016 (or 2019, depending on how you measure it), gold bug herds followed their leaders right off a cliff and into the desert. Even though this is in no way likely to be anything close to Operation Twist 1.0, the author advises gold bugs to keep their thinking caps on: “These are some slick operators at the controls.” NFTRH will track it the whole way through.

* Again, the author’s opinion, which he states explicitly.

Source: GoldSeek