Are Treasury Shorts About To Scream: 10s, 30s Plunge In Repo, "Fails" Galore
Submitted by Tyler Durden on 03/08/2016 11:10 -0500
Over the past week we have been following a disturbing development in the US Treasury market: while the repo rate on the 10Y has been sliding deep into negative territory for a while, on Friday it finally hit the "fails charge" of -3.00%, suggesting there is a massive shortage of Treasury paper as a result of wholesale shorting by various market participants.
Back then we explained the move as follows: "[as of this moment] the repo rate can't go any lower, and any demands to cover Treasury shorts are met with "Delivery Failure" notices. For those who are unfamiliar, a "Delivery Failure"occurs when one party fails to deliver a U.S. Treasury security, Agency Debt or Agency MBS to another party by the date previously agreed by the parties (Sifma has more). It also means that there is an unprecedented (and based on the historical data, record) amount of shorts who would rather pay the fails charge than to cover their positions on the delivery demand, or alternatively, there is simply not enough Treasurys in the private market that are not locked up in short positions. Finally, this means that the panicked scramble by various entities, including central banks, to short US Treasurys continues unabated."
Over the weekend Bloomberg picked up on this with a note titled " The Treasury Market's Big Short Is in 10-Year Notes, Repos Show" in which it reiterated as much:
Demand is so great for benchmark 10-year Treasuries in the $1.6 trillion market for borrowing and lending U.S. government debt, and supply is so short, that traders are willing to pay to lend cash to get their hands on the issue.
The overnight repurchase agreement rate on the newest 10-year note was negative 2.9 percent at noon New York time Monday, the lowest for any Treasury note or bond, according to ICAP Plc data. In the parlance of the repo world, that means the maturity is on ‘special,’ signaling heightened appetite for this specific security in deals where traders exchange the debt for overnight cash. In agreements lasting one month, the rate was as low as negative 1 percent last week, the most special since mid-2008, according to JPMorgan Chase & Co.
While futures traders have been short the maturity for about a year, the scramble in the repo market has intensified as the availability of the notes in cash dealings has dwindled.
There is more to it but the gist is clear: everyone is short the 10Y.
Today JPM confirmed as much when it said that according to the Treasury Client Survey for the week ended March 7, active clients were the most short since November 23; broken down as follows:
Longs 14 vs 20Neutrals 64, unchShorts 22 vs 16Net longs -8 vs 4
And then we got the latest repo data, where we find that the shortage has never been worse!
According to ICAP, the current 10Y remains at the "fails charge" of -3.00% in repo, which according to Bloomberg is a "reflection of the increasing short base and shortage of the security, which the Fed cannot alleviate because it doesn’t hold much of the issue."
As Stone McCarthy writes, "once again the 10-year note has fallen below the fails charge. The 10-year note has fallen below the -275 basis point fails charge at various times over the past four days, though currently it is at -280 basis points. With this much pressure on the issue, it may continue to trade special even after the new auction settles and it is classified as the off the run 10-year note."
Worse, the shortage at the 10Y has now drifted to the long end as well as someone is absolutely desperate to keep yields higher. More from SMRA:
"even more noteworthy is the 30-year bond's drop to -75 basis points. The 30-year bond rarely trades this tight, the last time it was below 75 basis points was December 14th, 2010."
And the shortage has even migrated to the short end! "The 3-year note is also trading special at -20 basis points this morning ahead of its auction this afternoon."
In short, pardon the pun, there is no OTR paper available at all!
To be sure, some optimists continue to hold out hope that new 10Y supply will "clear up the fails" although that is precisely what they said when the Treasury issuance announcement was made last week. It did not help. Meanwhile, the demand for paper is about double what is available: just yesterday, dealers took $905m of $906m 1.625% Feb-26 security available, after requesting double this amount or $1.822 billion.
Meanwhile, 10Y yields are starting to slide:
So after two consecutive market-wide squeezes, with oil on Friday, then Iron Ore on Monday, is today the day the short trap for Treasury bears is finally sprung and the 10Y pulls a "crude" and soars? Find out soon.
zerohedge.com
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Read Replies (2) of 18060 | | | Wall Street's Pile of Unwanted Treasuries Exposes Market Cracks
by Alexandra Scaggs Liz McCormick
March 20, 2016 — 6:00 PM EDT Updated on March 20, 2016 — 10:37 PM EDT
The world’s biggest bond dealers are getting saddled with Treasuries they can’t seem to easily get rid of, adding to evidence of cracks in the $13.3 trillion market for U.S. government debt.
The 22 primary dealers held more Treasuries last month than any time in the last two years, Federal Reserve Bank of New York data show. While at first glance that may suggest a bullish stance, the surge in holdings is more likely the result of investors including central banks dumping the debt on the firms, said JPMorgan Chase & Co. strategist Jay Barry. Foreign official accounts sold a net $105 billion of the securities in December and January, an unprecedented liquidation, Treasury Department data show.
Strategists say there are signs that the buildup of Treasuries held by dealers is having a ripple effect, mucking up the plumbing of the financial system. While the holdings show they did their job by soaking up the supply from central banks raising cash to support their currencies, it’s adding to questions about the resilience of the world’s most important market. The Treasury Department is already looking into whether the market isn’t operating as smoothly as it should.
Surging Holdings“This was a lot of dealers doing what they are supposed to do -- provide liquidity,” said Scott Buchta, head of fixed-income strategy at Brean Capital LLC in New York. “But the liquidity providers right now are getting the short end of the stick. It’s harder for dealers to offload these securities because the market depth just isn’t there.”
Primary dealers’ stash of Treasuries reached as high as $121 billion last month, the most since October 2013 and up from about $9 billion in July of last year. They held $111 billion as of March 9, almost double the average for the last five years.
As the world’s biggest bond dealers -- including banks such as Bank of America Corp., Goldman Sachs Group Inc. and JPMorgan -- struggled to get rid of the burgeoning pile of debt, the premium for the newest, easiest-to-trade Treasuries soared to the highest since 2011. The firms’ efforts to hedge all the Treasuries collecting on their balance sheets also roiled the futures market and a crucial corner of the financial system where traders lend and borrow securities overnight.
http://www.siliconinvestor.com/readmsg.aspx?msgid=30492037
http://www.siliconinvestor.com/readmsg.aspx?msgid=30492662
Under PressureAll of this has been happening as the bond-trading business has been coming under pressure. Last year, the world’s biggest banks generated the lowest revenue from fixed-income products since 2008, according to research firm Coalition Development Ltd. Critics contend that regulations enacted since the financial crisis, such as increasing capital requirements and curtailing leverage, restrict dealers’ willingness to make markets.
Officials say the rules have made the financial system safer. The Treasury Department is conducting its first comprehensive review of the government-debt market’s structure since 1998. The review was prompted by a 12-minute plunge and rebound in yields on Oct. 15, 2014. The market was closed in Japan Monday for a holiday.
“Without question, the reforms adopted following the crisis have created a stronger, more resilient system,” Antonio Weiss, counselor to Treasury secretary Jack Lew, said in prepared comments March 16 in Washington.
Upheaval EvidenceDealers moved to minimize the risk of holding so many tough-to-unload securities by selling, or shorting, benchmark notes, said Barry of JPMorgan. They had the biggest bearish position in the newest 30-year bonds since May in the week ended March 9, according to a Credit Agricole SA analysis of New York Fed data.
Part of the fallout was seen in the $1.6 trillion market for repurchase agreements, or repos, where Wall Street goes to exchange securities for overnight cash.
The combination of dealer demand, a global government-debt rally and reduced auction sizes caused a shortage in the repo market for the securities needed to close short positions in 10-year debt. Failures to deliver 10-year notes surged in the week ended March 9 to the most since at least 2013. For all Treasuries, failures reached the highest since the financial crisis, New York Fed data show.
Demand was so great for the benchmark 10-year note that its repo rate traded at about negative 3 percent for more than a week, before an auction of the debt settled March 15 and eased the shortage. At that level, the cost of borrowing the security in the repo market was steeper than the 3 percent penalty for uncompleted trades, leading more traders to opt to let deals fail.
“We haven’t seen anything at this sort of scale in three years,” said Barry, an interest-rate strategist at JPMorgan in New York.
The distortions extended into prices of cash Treasuries as well, as dealers’ efforts to unload their older, toughest-to-trade securities depressed prices of that debt. On March 2, the premium that the most liquid, newest securities, known as on-the-run notes, commanded over off-the-run securities reached the highest since 2011, data compiled by Bloomberg show.
Old debt was selling at such a deep discount that the typical buyers of those bonds -- money managers and pension funds who tend to hold them for long periods -- probably chose to stay away, said Gennadiy Goldberg, a New York-based interest-rate strategist for TD Securities (USA) LLC, a primary dealer.
Buying off-the-run debt is “normally a great trade, but when that spread widens from 3 basis points to 8 basis points, you don’t want to touch it, because you’re afraid it will widen from 8 to 12,” Goldberg said. “Dealers were stuck warehousing it.”
The increase in dealer ownership was most pronounced in Treasuries maturing in 11 or more years, for which holdings reached a record last month. Hedging of those positions widened the yield gap between 30-year bond futures and 30-year “ultra” futures, which are a better hedge for that maturity, according to David Keeble, New York-based head of fixed-income strategy at Credit Agricole. That spread grew as dealers bet on declines in the ultras.
Easing UpThere are signs that the dislocations have abated. The gap between prices of new and old securities has fallen closer to its average for the past year, and in the repo market, 10-year Treasuries are no longer what’s known as “on special.” Dealers that lend cash in exchange for the notes in these deals now receive interest, since the repo rate is positive.
Bond bulls can also take heart in how the stress on the system didn’t slow the rush into U.S. government debt this year. Treasuries maturing in greater than a year have earned 1.9 percent in 2016 as stocks slumped to start the year amid concern global economic growth was cooling, Bloomberg Treasury bond index data show.
In a twist, the demand for U.S. debt that drove 10-year yields toward record lows in February may have contributed to the strains, Keeble said. Buyers of Treasuries who typically don’t lend out securities in the repo market may have bought benchmark 10-year securities as a haven, he said.
For George Goncalves, head of rates research at primary dealer Nomura Securities Inc. in New York, dealers already holding so much debt may have less capacity to absorb more rounds of selling in the future.
“If there is another round of bond selloff, the market will need real-money support to keep everything orderly,” he said in a March 17 research note.
http://www.bloomberg.com/news/articles/2016-03-20/wall-street-s-pile-of-unwanted-treasuries-exposes-market-cracks
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