Why It's Not So Simple To Trade Operation Twist

Many experts are expecting the Federal Reserve to soon unveil “Operation Twist,” a plan to purchase long-term Treasury securities, and finance those purchases by shorting short-term Treasuries.

However, with the 10-year Treasury note trading at around 2%, odds are “Operation Twist” is mostly, if not fully, priced in.

Then again, 2% isn’t exactly 1% or 0.5%.

The performance of Treasury securities can be quite counterintuitive unpredictable.  For example, many bond experts expected interest rates to soar when QE2 ended.  In fact, the exact opposite happened.  If you need a refresher, we refer you to everything written about Bill Gross this year.

Whatever your biases may be, Gene Koyfman of Index Universe suggests two ETFs as an easy way to trade “Operation Twist.”  One of the best things about ETFs is that they can easily be shorted.

First is the iPath U.S. Treasury Flattener ETN (Ticker: FLAT).  This security gains when the yield curve flattens—when the spread between 2-year and 10-year notes shrink.

treasury flattener flat

Photo: FinViz.com

Second is the iShares Barclays 20+ Year Treasury Bond Fund (Ticker: TLT), which gains only when long-term rates fall.

treasury 20 year tlt

Photo: FinViz.com

If you’re feeling pretty confident about your interest rate expectations and you want to double down, ProShares offers a couple of levered ETFs that aim to double your gains (or losses).

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