Operation Twist: Can It Help Equity Prices?

During their latest episode of the VALUE: After Hours Podcast, Taylor, Carlisle, and Brewster discussed Operation Twist: Can It Help Equity Prices?. Here’s an excerpt from the episode:

Tobias: -in the 30-year bonds and all of the commercial credit has been amazing. I think Meb’s been posting about it a little bit saying– I don’t know what particular thing he’s talking about, but it’s down like 46%.

Jake: TLT, I think.

Tobias: [crosstalk] TLT.

Bill: Well, what I said to him one of the responses– Maybe this is really dumb, but anyone that was buying those bonds I feel like was price agnostic. So, either you had like an asset liability matcher or somebody who had a mandate to do it. Look, I bought some equity and you can argue– [crosstalk]

Tobias: People thought rates were going negative.

Jake: Yeah.

Bill: But those people, aren’t they typically levered and long and wouldn’t they have been stopped out? I’m sure some disappeared.

Jake: Well, it wasn’t like you were getting any yield along the way.

Bill: Look, I thought that rates could go negative. I’m still not convinced they can’t. So, I don’t know what I don’t know. I’m not convinced they can’t go to 18. I have no idea where they can go.

Jake: [laughs]

Bill: So, somewhere between -18%-

Jake: Somewhere between.

Bill: -is my confidence interval. But I just kind of feel like, I don’t know, I’m not sure who was buying those.

Tobias: Yeah. Meb didn’t specify. He just said– [crosstalk]

Jake: There had to have been a lot of institutional buyers, right?

Bill: Yeah, that I think don’t have a choice?

Tobias: There’s a chart that does the rounds that show all of the losses in all of those bonds that are held on bank balance sheets. It looks like–

Jake: Scary?

Tobias: It’s amazing how much they’ve lost. Like, I can’t believe there’s anything left. But I guess, it’s all held to maturity. So, it’s okay. You’re not impacted– [crosstalk]

Bill: Well, you’re impacted. Your shareholder returns are going to not be great, right? If you had a big slug and it’s earning two, and somebody else didn’t and they’re earning five, and capital seeks higher earnings streams, I would suspect the people that locked in too are going to have pretty shitty stock performance, but it is from a solvency issue–

Jake: What about that giant hedge fund that we call the Federal Reserve that owns a bunch of those long dated–? How the losses looking on that?

Bill: I don’t know about all this.

Tobias: They just fill that whole selves, can’t they?

Jake: Sure.

Tobias: I don’t know how that works.

Bill: Yeah, I don’t know.

Jake: Don’t you have to expand balance sheet to do that?

Bill: I don’t know how to– [crosstalk]

Tobias: [crosstalk] something like Twist. Operation Twist.

Jake: yeah.

Tobias: We’re just going to play with the yield curve a little bit.

Bill: I’d like to Operation Twist myself.

Jake: [laughs]

Bill: It’d be awesome. Try to get some of these equities up a little. That’d be a nice feeling.

Jake: Yeah.

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