In my view, and I've held it since this action was announced last year, the Fed is just trying to fund the maturity shift.
There was a recent BIS paper about this problem and the Fed's actions:
http://www.bis.org/publ/qtrpdf/r_qt1203e.pdf
Only eight pages, and it highlights the severity of the challenge:
Sovereign debt managers and monetary policymakers do not share the same goals.6 Seeking to minimise borrowing costs and maximise returns, Treasury debt managers could be tempted to take advantage of the lower long rates afforded by Fed bond purchase programmes by issuing more longer-term debt.7 As a matter of fact, the Treasury increased the average maturity of outstanding debt during LSAP1 and LSAP2 from 47 months in March 2009 to almost 59 months in June 2011 (Graph 3). We estimate that, all other things being equal, this would have pushed the 10-year bond yield up by 27 basis points during LSAP1 and 14 basis points during LSAP2 (Graph 2, left-hand panel). Were it not for the Treasury’s debt maturity extension, the 10-year yield would have been 80 basis points lower by mid-2011 (Graph 2, right-hand panel). The same lesson can be learned from the implementation of the original Operation Twist: its apparent lack of success can be partly attributed to the Treasury raising the average maturity of marketable debt from 41 months in 1960 to 55 months in 1963.8
The average maturity of Treasury debt outstanding remains well below the average level over the two decades preceding the crisis (Graph 3). Looking ahead, the Treasury may continue to favour issuance of longer-dated debt, and the average maturity of Treasury debt outstanding may rise further. The Treasury issued $310 billion in net marketable debt in the fourth quarter of 2011. It expects to issue an additional $444 billion in debt in the first quarter of 2012 and $200 billion in the second quarter, with plans for sales of more longer-term notes and bonds. The planned issuance of $644 billion in new debt in the first half of 2012 is larger than the $400 billion MEP. Expanding the size of Treasury debt outstanding would reduce the ratio of Fed Treasury holdings relative to debt outstanding, further diluting the stimulative effects of Fed asset purchases.
It's getting hard to sell all those long bonds at these rates. Banks can't buy them because they can't get locked into those rates. So the Fed is pushing one way and the Treasury is pushing another. They're essentially warning that the Fed needs to expand the program, and that if it doesn't the long rates will drift higher. Euro angst is helping the Treasury, but for how long?
You should look at the graphs in the paper.
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