OOOoops.....U.S. Treasury Sees `Market Dislocation'
U.S. Treasury Sees `Market Dislocation' in 2012 Notes (Update4)
Sept. 14 (Bloomberg) -- The U.S. Treasury, concerned about a possible ``market dislocation'' in the 4 3/8 percent note due in August 2012, ordered any firm holding more than $2 billion of the security to report their positions.
The Treasury, one of the regulators in the $4.1 trillion market for U.S. government debt, wants to avoid any disruption that may occur because one investor holds too many notes. Traders are willing to risk losing money to obtain the security because it is the cheapest that can be used to fulfill the $36 billion of futures contracts that come due on Sept. 30.
The request was prompted by an increase in the number of firms that borrowed the note and failed to return it, said a Treasury official who briefed reporters on the condition of anonymity. The last time there was concern about a shortage of Treasuries eligible to settle futures contracts was in June when a record $14.2 billion of notes were used to meet the obligations.
``This is a warning shot in people's foreheads, that if there's a squeeze this time, recess is over,'' said Howard Simons, a Chicago-based strategist at Bianco Research LLC. ``They are saying, `if we think you've done anything questionable, we are going to yell and scream your name all over the place.'''
This is the first time the government asked for ``large position reports,'' said a Treasury official who spoke on the condition of anonymity. The reports are due Sept. 20 for positions held at the close of business on Sept. 12, the Treasury said.
Fails
The Chicago Board of Trade is regulated by the Commodity Futures Trading Commission. The Treasury, the Securities and Exchange Commission and the Fed regulate the market for Treasury securities. Washington-based CFTC spokesman Alan Sobba didn't immediately return calls seeking comment. Chicago Board of Trade spokeswoman Maria Gemskie declined to comment.
So-called fails occur when a trade doesn't settle on schedule, with one side failing either to receive or deliver the security. More than $530 billion of Treasuries trade daily, according to Federal Reserve statistics.
While there are $19.6 billion of 4 3/8 percent August 2012 notes, traders can use any of 13 Treasuries with about $314 billion outstanding to fulfill the September futures contract. The contract closed yielding 4.47 percent at 2 p.m. in Chicago.
June Expiration
Futures are agreements to buy or sell securities at a set price and time. Ten-year Treasury note futures expire in March, June, September and December. Expirations traditionally generated little interest because traders usually extended their bets, or rolled the futures, into the next quarter instead of demanding notes to fulfill the contracts.
Pacific Investment Management Co., manager of the world's largest bond fund, had Treasuries delivered to fulfill its June futures contracts, Bill Gross, the firm's chief investment officer said in an Aug. 10 interview. Gross didn't return calls seeking comment.
The $36 billion of outstanding September futures is almost twice the $18.6 billion of June contracts outstanding a week before trading of those ended on June 21. Open interest in September contracts declined from $181.8 billion on July 21.
There are 16 more days to settle the futures contracts. The Chicago Board of Trade will impose rules in December that limit traders to holding no more than $5 billion of 10-year note futures contracts in the last 10 days of its life.
The 2012 note yielded 4.02 percent, up from 3.75 percent on June 30, according to data compiled by Bloomberg. The note is likely to remain under scrutiny because it is also the cheapest Treasury to deliver for the December futures contract.
`Prudent'
So many traders want the note that they are willing to lend money at zero percent overnight in exchange for temporary ownership. The so-called repurchase, or repo, rate is 0.35 percent until Sept. 30, the last day they can deliver securities to fulfill futures contracts.
In repos, firms sell securities for a given period to raise money to finance positions in Treasuries. In a reverse repo, they borrow the security and lend money. The market for repos exceeds $5.6 trillion, Fed data show.
``The Treasury is doing the prudent and proper thing with this position call to find out who owns them and who is or is not lending them out in repo,'' said Gerald Lucas, chief Treasury strategist at Banc of America Securities in New York, one of the 22 primary dealers of U.S. government securities that trade with the Federal Reserve Bank of New York.
``If the Fed can find someone who owns the issue and is not lending it out, perhaps it can entice this owner to lend it out, thereby increasing the deliverable supply. That would definitely help with the delivery process.''
`Chilling Effect'
The New York Fed lent primary dealers $950 billion of the August 2012 note today, and $1.175 billion yesterday. The New York Fed can lend up to 65 percent of the $2.866 billion it holds of the note to alleviate shortages in the market. On Sept. 12, the New York Fed lent $1 billion of the notes.
``This has a chilling effect,'' Bianco's Simons said. ``You may start to lower the utility of the bond futures contract as a trading vehicle,'' because traders may be concerned they may be forced to sell positions in underlying assets if they hold what's deemed to be too much of it.
The spotlight on Treasury note futures is an example of the increasing influence of derivatives, contracts whose values are derived from financial obligations such as stocks or bonds. Treasury futures are exchange-traded derivatives.
Trading in the contracts doubled in the past three years as investors used them instead of the underlying securities to make or reduce bets in the bond market. |
