Operation Twist is a monetary policy operation implemented by the Federal Reserve in September 2011 that involves the sale and purchase of U.S. Treasury bonds. It defines the system of economic policy where the Federal Reserve buys and sells both short term and long term U.S. Treasury bonds, depending on their objective.
The idea of Operation Twist was given for the first time in 1961 as a means to support the United States dollar and rouse the cash flow into the economy. At that time, the U.S. economy was recovering from a state of recession resulting at the end of the Korean War.
In order to promote public spending’s in the economy, the idea was adopted of selling short term bonds in the market and using the profits from the sale to purchase long term U.S. Treasury bonds.
Remember that there is a converse correlation between yield and bond prices; the yield increases when the price of bonds goes down and vice versa. The Federal Reserve activity of buying long term bonds drive up the costs, and in turn, yield decreases. While on the other hand, the selling of short term bonds increase the rates and price of bonds goes down.
Subsequently, the Operation Twist implicates the Federal Reserve leaving the short term rates unaffected because only long term rates will be impacted by the buy and sell action of securities conducted in the markets. This would cause long term yield to decline at a higher rate than short term yield.