'Operation Twist' likely a prelude to QE3

One of the excuses we often hear about our federal debt is that �we owe it to ourselves,� meaning our $15.4 trillion in debt really isn�t so bad since interest checks are sent to individuals, pension accounts and other private holders of U.S. Treasury bonds. But that�s no longer true.

We owe our new debt to the Fed!

On Friday, The Wall Street Journal reported the Fed�s Operation Twist has overpowered the most recent long-term Treasury bond auctions. According to the Journal, data compiled by Barclays Capital shows that since Operation Twist began in October, the Fed has bought $50.3 billion in new Treasury bonds maturing in 20 to 30 years, accounting for a whopping 91% of new long-term Treasury bonds.

This trend makes it clear that the Fed has been manipulating the long end of the yield curve. As a result of these shocking statistics, it is becoming increasingly apparent that after Operation Twist ends, the Fed might have to implement a third round of quantitative easing to prevent Treasury bond yields from soaring.

Last Wednesday, San Francisco Fed President John Williams gave a speech in San Ramon, Calif., in which he implied the Fed was ready to do a third round of quantitative easing if the current economic recovery faltered. Williams is one of the �doves� that now dominate the Federal Open Market Committee, which has been flattening the yield curve and keeping key interest rates near 0%.

It is clear investors are so frustrated with low interest rates, which the Fed has promised to maintain at near 0% through 2014, that the stock market has been �melting up� on persistent order imbalances. This makes me optimistic we will likely continue to see a strong stock market in upcoming weeks.

The opinions contained in this column are solely those of the writer.

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