The Obvious 'Operation Twist' Bet Is Already Failing

Prior to the onset of operation twist, one of the hot ideas was to buy the FLAT ETF, an ETF that rises as the yield curve gets flatter.

This would seemingly make sense, since in operation twist, the Fed buys longer term bonds (theoretically pushing rates down) and sells short term bonds (perhaps causing yields to rise on the short end).

But Fed movements have never been this straightforward. As we’ve pointed out ad nauseum, both QEs caused longer-term rates to RISE, and longer-term rates have fallen in periods of no QE. And it’s not that complicated really, if you just recognise the fact that stimulus in any form should cause growth and inflation expectations to rise, thus pushing up long rates.

And so the FLAT ETF has gone splat since the end of September.

Of course, retail investors who screwed up on this one, shouldn’t feel too bad. The biggest bond pro in the world has been missing the QE play all year.


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