GS Meschoulam Operation Twist 4.0 Path vs Destination 20 Aug 2026

GS Meschoulam - Operation Twist 4.0: Path vs Destination 20 Aug 2026 Meschoulam · Goldman Sachs · MarketStrats, FICC & Equities Thu 20 Aug 2026, 5:15am ET

Bottom line: Our scepticism is not that policymakers lack the tools to influence the long end. History shows they do, at least temporarily. Our scepticism is that today's problem appears increasingly fiscal rather than technical. The DM examples tell us that term premia can be compressed. The EM examples tell us that once markets focus on sovereign financing dynamics, yield suppression becomes progressively less effective. The most likely outcome is therefore a temporary flattening, not a permanent solution. Policymakers may succeed in slowing the rise in long-end yields and injecting two-way risk into crowded steepener positions. But unless growth weakens materially, inflation falls decisively and fiscal concerns begin to improve, it is difficult to see how they sustainably reverse the broader trend.

Operation Twist can influence term premia, but cannot eliminate them. Twists can change the path, but they rarely change the destination.

Bessent announced a timely intervention to contain long-end yields by doubling the amount of >10y bonds the Treasury can buy back. In absolute terms, the quantities are de minimis and could easily have been incorporated into the last TBAC refunding announcement. But Bessent was clearly trying to send a message. As such, these measures should be viewed less as a regime shift and more as an attempt to introduce two-way risk into what has become an increasingly crowded steepener consensus and a broadly one-way trade in long-end rates.

The market has become comfortable expressing a structurally bearish duration view through the long end. If policymakers can signal a willingness to alter issuance patterns, encourage balance sheet support for longer maturities, or otherwise lean against the rise in term premia, then the steepener is no longer a one- way bet. The goal may be as much psychological as mechanical. So much for Warsh's ambition to shrink the balance sheet. One could even argue that Treasury intervention became necessary precisely because recent Fed communication failed to prevent an undesirable tightening in long-end financial conditions. This potential tension between Treasury market management and Fed balance-sheet normalisation will be worth watching closely into Jackson Hole.

The immediate reaction was understandable, if small with 30y yields falling -10bp (bull flattening the curve). Indeed, the sharpness of the reaction arguably tells us more about positioning than fundamentals. The front-end is stuck and more fairly priced, and with the long-end potentially more stuck post announcement, the pressure was felt most acutely in the dollar. As any student of thermodynamics will tell you, pressure can be redirected but rarely eliminated. If one release valve is partially closed, it tends to

emerge elsewhere until a new equilibrium is reached. In this case, that pressure was felt most acutely in the dollar (at least until positioning gets overextended...again).

That said, history suggests there is a meaningful difference between slowing a move in long-end yields and reversing it.

US twists: The original US Operation Twist in 1961 and the Fed's 2011 Maturity Extension Programme both succeeded in lowering long-end yields, but the effects were relatively modest, generally estimated at around 10-20bp. The common feature was that policymakers were working with the underlying macro backdrop rather than against it. Inflation was subdued, growth was weak, and markets were already predisposed towards lower rates.

Japan YCC: Japan's YCC experience provides the most successful example of long-end suppression. The BOJ managed to control yields for years, but only because inflation was absent, domestic savings were abundant and investors broadly accepted the equilibrium yield level being enforced. Even there, once inflation returned, maintaining the cap became increasingly costly and ultimately unsustainable (though then unraveling took years).

Australia's yield caps: Australia provides the cautionary tale. Yield control worked perfectly until markets…