Operation Twist is a type of monetary policy strategy employed by central banks in order to stimulate economic growth by lowering long-term interest rates. This is accomplished by selling short-term government bonds (Treasury bills) and using the proceeds to purchase longer-term government bonds, with an aim of “twisting” the shape of the yield curve. This means that by simultaneous shifts in both short-term and long-term yields, the yield curve is “twisted”, with the longer-dated yields being artificially depressed.

The idea behind Operation Twist is that lower long-term interest rates will encourage business and consumer spending, making investments more appealing, encouraging borrowing for investment and home purchases, and eventually stimulating economic growth. The Reserve Bank of Australia began their own version of Operation Twist in April 2020 in response to the economic fall-out of the Covid-19 pandemic.

Operation Twist was first employed in 1961 by the Federal Reserve in order to stimulate the economy by lowering mortgage rates and encouraging consumer spending. The strategy was more recently employed with an adjustment to the language and scope of measures by the Federal Reserve following the 2008 economic collapse caused by the Great Recession.

In its current form, Operation Twist consists of the Federal Reserve buying Treasury securities with maturities of six to thirty years and selling securities with maturities of three years or less. The proceeds of the short-term Treasury sales are then used to purchase the longer-dated securities. This shift in yields has the effect of flattening the yield curve and encouraging business investment.

To date, Operation Twist has been used as a tool to shape the yield curve and stimulate investment, with early indicators pointing towards its success. The benefits of Operation Twist as a tool to spur economic growth, however, remain subject to debate and further analysis as to its efficacy.