Most Fed watchers had anticipated the announcement of Operation Twist for months. Treasury traders were on board, causing long-term Treasury rates to fall. As a result, many believed the twist was priced in.
However, long-term rates continued to fall following the Fed’s confirmation of the twist.
Some, including Deutsche Bank, argued that the Fed’s program was more aggressive than expected.
Morgan Stanley thinks “markets remain unconvinced that [operation twist] will have any material impact on easing financial conditions.” Perhaps the flattening yield curve is just the result of a fear trade as the global economy continues to deteriorate.
Regardless, bold traders who bet that the yield curve would continue flatten after the Fed’s announcement are making money. Check out this chart of the iPath U.S. Treasury Flattener ETN (Ticker: FLAT), a security that gains when the yield curve flattens–specifically when the spread between 2-year and 10-year notes shrink.
Photo: Yahoo Finance
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