I think the impact of Operation Twist is already reflected in CD rates. Here's why, with some background for those just tuning into the ongoing central bank saga.
Richard W. Fisher, president of the Federal Reserve Bank of Dallas and voting member of the Federal Open Market Committee, spoke on Tuesday before the Dallas Assembly to explain his dissenting vote at the last meeting of the FOMC. In last week's meeting, he cast one of three dissenting votes against the actions taken by the committee.
Known as Operation Twist, the Fed plans to sell $400 billion of short-term Treasury securities, those with remaining maturities of 3 years or less, and replace them with longer-dated Treasury securities, those with maturities of 6 to 30 years.
Operation Twist is not an original idea; the central bank first implemented the program in 1961. A study of the first Operation Twist by Eric Swanson from the Federal Reserve Bank of San Francisco helped form Fisher's opinion about using it this time around.
Swanson estimated that the impact of the 1961 program resulted in a 15-basis-point reduction―remember, 15 basis points is 15 one-hundredths of 1 percent―in long-term Treasury yields and a 2- to 4-basis-point―2 to 4 one-hundredths of 1 percent―reduction in corporate bond yields.
Swanson’s paper follows upon an insightful study by two top economists at Northwestern University who estimated that QE2―the previous round of accommodation―lowered Treasury yields by roughly 20 basis points and investment grade corporate bond yields by about 7 to 12 basis points.
In Bankrate's rate survey last week, longer-term CD rates dropped a bit ahead of the Fed announcement.
The average five-year CD yield was 1.34 percent on Sept. 14. The rate survey on Sept. 21 found the five-year CD yield 3 basis points lower at 1.31 percent.
Very short-term CD rates are directly tied to short-term interest rates but longer-term CD rates are influenced by other factors, including the 10-year Treasury yield.
The 10-year Treasury yield has been pretty much in free fall since the end of July. Last week following the FOMC meeting, the 10-year note set a record low, dipping to 1.85 percent according to the Marketwatch.com story, "Treasury yields set record low after FOMC."
Yields went even lower two days following the meeting, as far as 1.67 percent -- but there has been a rebound in recent days with the 10-year note yielding 2.125 percent today according to Bloomberg.
Getting back to CD rates, following the launch of QE2 in November 2010, the average five-year CD rate as tracked by Bankrate fell 5 basis points over the course of the month before rebounding. Based on that, I am going to go out on a limb and say Operation Twist is already reflected in five-year CD rates.
There may be another dip in today's rate survey -- to be published in tomorrow's Interest Rate Roundup --but I think that may be it. There are some other factors at play, of course, like banks' profit margins and need for deposits, that impact CD rates.
What do you think? I could be completely wrong, let me know in the comments.
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