There is speculation about how the Fed might proceed if growth falters.
The thinking is that the Fed would prefer to do another Operation Twist (buying long-dated Treasuries and selling the short end) rather than additional QE because of potential inflation and political backlash.
Analysts at Citi say that economically, OpTwist has been just as effective as QE. The problem is that the Fed doesn’t have many short-dated bonds left to sell. One solution is to sell 4-5 year notes rather than the 1-3 range that has been the focus.There is also talk the Fed could issue short-term debt and use it to buy long-term bonds.
Another problem is that the Fed already owns about 30% of the +10-year Treasury market. Liquidity could be a concern if they get up to 50%.
