After its meeting on September 21, the Federal Open Market Committee (FOMC) announced that it was launching ”Operation Twist” in a bid to lower long-term interest rates even further. Under the program, the US Federal Reserve will purchase $400 billion of Treasury securities with maturities of six years to 30 years by June 2012. It will also sell an equal amount of Treasury securities with remaining maturities of three years or less. Additionally, the Fed will reinvest principal payments from its vast holdings of agency debt and mortgage-backed securities–it currently holds about $1 trillion worth of mortgage debt according to its most recent data release–into additional agency mortgage-backed bonds.

Citing high unemployment and the weak economic recovery as justifications for this latest move, the Fed hopes that pushing down rates on long-term Treasury bonds and mortgage debt will reduce the cost of borrowing for businesses and consumers, sparking a credit expansion.

There’s a hole in the Fed’s logic, however, since it seems to be ignoring some of its own data.

Each quarter, the Fed conducts a survey of senior loan officers in order to gauge loan demand and monitor any changes in lending standards and terms. Respondents to the Fed’s July survey reported that despite some modest easing of lending standards, banks have experienced weaker demand over the past quarter for most loan categories. Some increased demand in the commercial sector wasn’t enough to offset the extreme weakness in consumer and mortgage lending.

There are two reasons for the weak lending, neither of which is related to interest rates. The first reason is that despite the reported weakening of lending standards, it’s still much more difficult to get a loan today than in 2006. Unfortunately, the people who need loans the most right now–the unemployed and those on the verge of losing their homes–are also among the worst credit risks. If the banks resume lending to uncreditworthy borrowers, it will only lead to further problems down the road.

The second reason is that those consumers and businesses that can afford to borrow money are still in deleveraging mode, with businesses and households paying off debt and cleaning up balance sheets. That’s understandable given the weak state of the economy. And with more than $13 trillion in household debt outstanding–the ratio of household debt-to-income is currently 114 percent–another borrowing boom is unlikely to develop any time soon.

As a result, we’re not terribly optimistic about Operation Twist’s prospects since it’s merely treating the symptoms while ignoring the disease. Rather, this latest program suggests the Fed is out of options for treating the weak economy; the problems facing our economy would be better addressed through fiscal policy rather than monetary policy. But after years of profligate spending, our fiscal authorities aren’t in a position to do much about this either at the moment.

While there’s enough aggregate demand to prevent the global economy from sliding into another recession–at least for the time being–economic growth will be tepid until businesses and consumers are further along in the deleveraging process.

In the interim, there’s a way for exchange-traded fund (ETF) investors to play Operation Twist.

The Fed’s purchase of $400 billion in long-dated Treasuries over the next several months should generate substantial additional demand for such securities. Going long US Treasury bonds with an ETF such as iShares Barclays 20+ Treasury Bond (NYSE: TLT) positions investors to benefit from the Fed’s activity.

What’s New

While 12 new ETFs were launched last week, only two are of particular note.

Two new “dim sum bond” ETFs, which focus on debt denominated in Chinese yuan and issued in Hong Kong, are now trading. Guggenheim Yuan Bond ETF (NYSE: RMB) was the first to hit the market on September 22, followed by PowerShares Chinese Yuan Dim Sum Bond (NYSE: DSUM) the next day. Both ETFs appear to be nearly identical. The only difference that is readily apparent is that DSUM will charge an annual expense ratio of 0.45 percent, while RMB will charge 0.65 percent.

Portfolio Roundup

Our Global ETF Profits Model Portfolio declined 3.7 percent over the trailing week, as compared to a 2.2 percent loss for the S&P 500 and a 1.4 percent loss for the MSCI EAFE Index. Our European and emerging markets exposure accounted for a portion of this loss. But the worst losses came from our Income & Hedges positions, where only municipal bonds and Treasuries remained flat while the other positions declined.

• SPDR Gold Shares (NYSE: GLD) suffered the most, falling by 8.6 percent. The markets were relieved when European leaders seemed to finally understand the severity of their sovereign debt crisis after a meeting of global financial leaders last weekend. While no concrete plans resulted from the meeting, comments from European leaders afterward suggested there will be greater cooperation in addressing the region’s financial difficulties. Nevertheless, there will likely be additional setbacks on the way to resolving the debt crisis, so continue to hedge against such risk by buying SPDR Gold Shares at current prices.