Question

Why did US Quantitative Easing 2 (operation twist) focus on the yield on the 10 year US Treasury Note?

Group of answer choices

It is the benchmark for 30 year mortgages

It is the most liquid treasury

It is the benchmark risk free rate for equity valuation (i.e., CAPM)

It is the base rate for New Issue Corporate Bonds before adding a credit spread

Answer 1

The answer is – “It is the base rate for New Issue Corporate Bonds before adding a credit spread”.

Explanation – It should be noted that the 10 year Treasury note is the benchmark for interest rates on all fixed-rate loans as well as the base rate for New Issue Corporate Bonds before adding a credit spread. Operation twist involved buying more 10 year Treasury note so as to increase its demand and hence its price. Interest rates will fall with increased prices and so rates for corporate bonds will also fall. This will make it cheaper for companies to raise funds through issue of bonds.