As promised on Wednesday afternoon, the United States Federal Reserve decided to start a program dubbed by many as “Operation Twist.” The crux of the program is to twist the yield curve by swapping short term government securities for long term ones.
In a statement released by the Fed on Wednesday afternoon,the Fed said it would buy $400 billion of Treasury securities in the 6 to 30 year year range and sell an equal amount of securities that mature in 3 years or less. The Fed also plans on purchasing mortgage backed securities with proceeds from the maturing securities.
The Fed states it is acting due to “significant downside risks to the economic outlook, including strains in global financial markets.”
The Dow Jones sank 284 points into the red after the Fed released its statement.
“Operation Twist” is likely to cause pain for the nation’s largest pension funds, already struggling with funding shortfalls from the recent stock market decline. Hit both by falling stock prices and falling bond yields, the 100 largest pension plans of public U.S. companies had assets covering 79% of their liabilities the end of August. This is down from 86% at the end of 2010. The all time low for the funds was 70.1% in August 2010.
Corporate pensions were well funded back in 2007 before the financial crisis. Although the stock market has recouped most of its losses, falling bond yields have prevented the funds from regaining their solid footing.
Most private U.S. defined benefit plans, which oversee about $2 trillion, are hurt when long-term yields decline mostly because of the way the plans must value future payouts they will make to retirees in coming decades. The total doesn’t include the defined contribution plans like 401(K)’s, which contain almost $5 trillion and put the responsibility on workers to manage their own finances. Those plans have been hit by falling markets, but do not face the same accounting challenge that will be presented as “Operation Twist” takes effect.