Hot Demand For 10-Year Treasurys Causes Supply Squeeze In Repos – WSJ

-Repo rate for the 10-year notes has plunged below zero in recent weeks

-Market participants pay dearly to obtain 10-year notes in overnight repos

-Some traders say this week’s 10-year auction will help ease squeeze

By Min Zeng and Cynthia Lin


NEW YORK (Dow Jones)–Surging demand for 10-year Treasury notes is generating a severe supply drought in a key U.S. short-term funding market, forcing banks, bond dealers and hedge funds to pay exorbitantly high prices to buy the benchmark debt.

The pain is coming in the securities repurchase, or repo, market. Repo-market participants borrow cash using Treasurys as collateral, or borrow Treasurys by lending cash in order to hedge their trading positions in fixed-income markets.

The scarcity of 10-year notes has become so sharp that market participants are now paying about 3% interest in order to make these so-called repo trades. In normal situations, investors would earn a small amount of return to make these trades.

“This is the biggest squeeze since 2009,” said Scott Skyrm, global head of money markets and repo at Newedge USA. “Demand has surged for safe-haven Treasurys and supply was taken out of the repo market.”

The good news is that the tension hasn’t yet caused problems for the entire repo market–often dubbed the oil that greases the wheels of the broader economy–because it is only concentrated to the benchmark debt.

Some traders hope the 10-year tension will be relieved soon because the U.S. government auctioned $21 billion in 10-year notes Tuesday that will be settled Thursday. But some traders warn this won’t happen because so many new buyers–including foreign central banks and investment funds–usually hold the notes instead of lending them out.

In late-afternoon trade Wednesday, the 10-year benchmark note fell 6/32 in price to 101 1/32, yielding 2.010%. Bond prices move inversely to their yields.

The 30-year bond outperformed, with its price boosted by strong demand on a $13 billion same-maturity auction. The long bond’s price rose 10/32 to 108 14/32 to yield 3.304%.

Increasing debt-crisis fears on both sides of the Atlantic last month sparked a historic flight-to-safety to the Treasurys market, pushing 10-year yields below 2% for the first time in at least 50 years. The notes got an extra boost from increasing hopes that the Federal Reserve will buy more long-dated Treasurys to stimulate the economy.

The plunging yields, though, have galvanized some dealers to increase bets that Treasurys will start losing value because they think the upward run the past seven months will soon peter out. The benchmark 10-year yield tumbled to 1.875% on Monday, the lowest level since the 1940s. It was as high as 3.77% in February.

The repo-market stress reflects the 10-year scarcity. The repo rate for 10-year debt plunged below zero a month ago and traded at negative 2.9% on Wednesday, meaning traders are paying a 2.9% interest rate in order to lend cash to obtain 10-year notes. The rate briefly dipped below negative 3% in recent sessions.

In contrast, the benchmark repo rate to borrow a basket of Treasurys, not just one specific security, traded slightly above zero Wednesday.

“The dislocation should be resolved shortly with new supply coming in, and I expect the repo rate to be less negative and to trade more in line with other maturities,” said a head repo trader at a primary dealer bank.

Joseph Abate, money-market strategist at Barclays Capital, said he expects the repo rate to trade around negative 0.25% through September.

(Min Zeng writes about global fixed income and currency markets for Dow Jones Newswires. He can be reached at 212-416-2229 or via email at:

The original article is here.

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