10-Year US Treasury Borrowing Rate on Repo Market Turns Negative, Indicating Stress
The cost of borrowing 10-year U.S. Treasuries in the overnight, or repo, market turned deeply negative on Thursday, analysts said, as investors sought to sell the notes short, prompting tensions in the market.
Negative rates in the repo market, which is important to the financial system, with trillions of dollars in short-term loans traded daily, in part reflect uncertainty over how long the U.S. Federal Reserve will maintain its policy. accommodative monetary policy.
“There is more stress in the market right now because the market is very volatile,” said Scott Skyrm, executive vice president of brokerage firm Curvature Securities.
The negative cost of borrowing came as investors sold the notes short in the bet that U.S. Treasury yields would continue to rise, on expectations of increased issuance to fund the U.S. stimulus package, and on the downside. optimism about the prospects for recovery as the country emerges from the coronavirus pandemic.
This boosted short positions in the benchmark US Treasury note which last fell 1.578%.
The 10-year borrowing rate, which is generally positive, has been negative since Monday and hit -4.25% on Thursday, analysts said. It was last at -0.50% when the federal government stepped in on Thursday to sell 10-year US Treasuries in the market. The last time 10-year U.S. pension rates turned negative before this week was in June 2020 and before that in March of the same year, Skyrm said.
The general rate of guarantees, however, remained above zero on Thursday at 0.05%, after falling last week to -0.05 basis point.
The repo market sees Wall Street financial institutions borrow from money market funds and other investors and pledge their treasury bills and other securities they hold as collateral. Lenders in repo markets typically include money market funds, insurance companies, corporations, municipalities, central banks, and commercial banks that have excess liquidity to invest.
Negative repo rates usually occur when a particular collateral security becomes in demand – in this case, analysts have pointed to the 10-year Treasury – or there is a tight supply in the repo market.
In order to borrow these securities, buyers must tempt potential sellers with cheap liquidity or a repo rate lower than the general repo rate of collateral.
On the other hand, brokers and deposit-taking institutions borrow cash against long positions in securities to finance their net stocks and balance sheet position.
“There is general pressure on short-term rates, the same themes that have been in place for some time,” said Tom Simons, money market economist at Jefferies.
“The supply is down – we have every other day bill refunds here in the range of $ 25 billion to $ 30 billion.”
Gennadiy Goldberg, senior rate strategist at TD Securities, said brokerage positions in non-race and older securities rose sharply with the massive sell-off of Treasuries pushing yields higher. Brokers have attempted to hedge this risk by selling current or newer securities.
“This has caused the cost of borrowing treasury bills on the fly to drop sharply and exceed the failure rate, which is the penalty rate that market participants pay if they cannot provide a security,” he added.
This so-called failure rate is -3%, Goldberg said.
Some investors also looked to the Fed for guarantees on Thursday, as its reverse repurchase transaction registered a demand of $ 2.1 billion, up from half a billion on Wednesday. Demand in the facility rose last week as Treasury volatility increased, peaking at $ 11.2 billion on Friday.
Skyrm said Thursday that the Fed had loaned $ 8.7 billion of its $ 10.9 billion US 10-year notes, easing the debt tightening.
Analysts also said dealers are also gearing up for next week’s US Treasury auction with the sale of $ 38 billion of US 10-year notes reopened, particularly following the poor auction. tickets at 7 from last week.
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