It’s been a few months since we saw any major dislocations in the Treasury repo market, i.e., collateral shortages as a result of surging TSY shorts; for the simple reason that after the first quarter when everyone was certain that Trump reflation trade would kick in but didn’t, the record number of built up spec net shorts got trampled by the rising price, rapidly shifting over to record longs.
However, the peace and quiet quiet in the repo market was shattered this week, when almost overnight the 10Y went from “normal” in repo on Friday, to a special -2.00% on Tuesday, and then a Super Special, near-record, “fails rate” of -3.45% this morning.
Commenting on this dramatic move in 10Y repo rates, Stone McCarthy’s Alan Chernoff, notes that “The 10-year note continues its descent through the fails charge and is at -3.45% at the time of this writing. Issues often tighten prior to their auctions due to increased demand from traders hedging prior to the auction and decreased supply from dealers liquidating since they have to be involved in the auction. We don’t expect it to rise above the fails rate for the next few days, possibly not even until the new auction settles.”
As a reminder, the fails rate is the 300 basis points below the lower end of the target fed funds rate, putting it at -200 basis points currently. And, if an issue falls below the fails rate, it becomes cheaper to just pay the fails charge of 200 basis points rather than deliver than issue, which is what is happening. In dollar terms, the repo fails amount has surged…
To be sure, some firms that want to maintain good client relationships will likely want to deliver the trade at such a low rate, although it appears that not many are rushing to do so.
As Bloomberg writes, confirming what we have said repeatedly in the past 3 years when we commented on these sudden repo market dislocations, the “specialness is due to lack of supply as shorts roll from triple-issued old 10Y into single issue current 10Y.”
Finally, Chernoff notes that “The 3-year note remains tight this morning at 0.65%, and the 30-year is at 0.60%. Both issues will have the details of next week’s auctions announced later this morning. Most of the rest of overnight repo is trading near GC.”
So is this super-special repo a signal that – despite a rise in net spec futures exposure – that traders are positioning a big bond short ahead of tomorrow’s payrolls print?