Following Surge In "Fails To Deliver" To Two Year Highs, Treasury Market Finds A Brief Respite

Tyler Durden's picture


Our "silver lining" concluding remark to last week's lackluster 10 Year bond reopening auction was that "the good news is that with the reopening, dealers should have some additional collateral for a while, or at least until the Fed monetizes it. Look for this CUSIP - VB3 (On The Run) to remain on the POMO exclusion lists for white a while." Sure enough, following the Friday settlement of this auction, things in the Treasury repo market have normalized somewhat after hitting very dangerous levels. How bad did it get? The following chart of failures to deliver from the NY Fed shows just how acute the shortage of "high quality collateral" (where the 10 Year is the fulcrum instrument) got in the past two months, with the total rising to $129 billion, or the biggest freeze in the repo market since the debt-ceiling crisis in the summer of 2011 when this number hit $280 billion.

In the grand scheme of things, however, the recent move is tiny by complete market lock up measures: one need only recall that during the height of the Lehman failure crisis, virtually the entire $3 trillion repo market had locked up and not a single Treasury was being delivered or received in repo (this is somewhat apples to oranges as the Fed revised its methodology of tracking primary dealer data at the end of March).

But perhaps the best indicator of just how bad the Treasury market had gotten until the settlement of last week's 10 Year reopening, is the repo rate, which had plunged deep inside special territory in the first week of June and was consistently at the penalty rate of -3% (established in 2009), and slightly special for far longer. This means that those seeking to borrow 10 Year paper have had to pay up to 3% on an annualized basis: hardly a sustainable IRR in the ZIRP new normal.

This was also reflected in the General Collateral rate which recently dropped to as low as 0.04% or the lowest since July 2011, and which popped back to double digit territory, or 0.11% according to ICAP, as of this morning.

That said, don't expect the renormalization in 10 Year repo rates to last: if anything, last week's auction showed just how thin the liquidity and collateral availability in shadow banking really is: if just a $7.7 billion allottment to Primary Dealers (as per the 10 Year reopening) can send the repo rate from -3% to positive, then the action on the margin is truly unprecedented.

This is accentuated by both the Fed's ongoing monetizations in the 10 Year space which actively withdraws securities from the private market, as well as the aggressive shorting of 10 Year paper, both as an outright bet on interest rates, and as a need to hedge rate risk in pair trades with corporate bond purchases.

Keep an eye on the repo market: with such pronounced collateral shortages, and with the Fed repeatedly expressing its concerns with the shadow banking system, Bernanke may be ignoring all signs of bubbles in the traditional markets, but he has no choice but to take the signals sent by the shadow market seriously. And if he indeed does not taper, this means that even more eligible OTR collateral will be withdrawn from the market, repo rates will continues to be punitive, and sooner or later this will have a substantial impact on downstream liquidity channels, first at the Primary Dealer community, and then everywhere else.

Source: NY Fed

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Mon, 06/17/2013 - 10:39 | 3664759 spastic_colon
spastic_colon's picture

everyone remembers that today is the largest POMO of the month right?

Mon, 06/17/2013 - 10:46 | 3664780 SheepDog-One
SheepDog-One's picture

Sure looks like all the pigs have already lined up at the trough for the Bernank slopfest.

Mon, 06/17/2013 - 10:56 | 3664801 Sudden Debt
Sudden Debt's picture

how much money will you get today?

Mon, 06/17/2013 - 10:43 | 3664773 vote_libertaria...
vote_libertarian_party's picture

Soooooooo....your saying buy buy buy stocks???  (cause that is what everybody on the boob tube says)

Mon, 06/17/2013 - 10:44 | 3664775 SheepDog-One
SheepDog-One's picture

Yea and they can keep yelling it till they're blue in the face and keel over dead because I'll never buy any of their junk ever again!

Mon, 06/17/2013 - 11:33 | 3664908 otto skorzeny
otto skorzeny's picture

That's what drives these coked out cunts on Wall Street crazy-all that cash sitting on the sidelines.

Mon, 06/17/2013 - 10:43 | 3664774 SheepDog-One
SheepDog-One's picture

'Just' $7.7 billion dollars'....see that's the crux of the problem here, it's called 'tiny' yet I doubt the country's largest banks together have anywhere near that much in cash deposits in reality. Once again we're dealing with these monster bubbles in order to just keep the bankers placated a bit. 

Mon, 06/17/2013 - 11:10 | 3664776 hooligan2009
hooligan2009's picture

thanks for reminding the NSA!




wait...prism fart..maybe i did and it got jumped!

Mon, 06/17/2013 - 10:46 | 3664777 Aaaarghh
Aaaarghh's picture

damn, I wish i understood what this meant...need a 'bonds for dummies' book

Mon, 06/17/2013 - 10:48 | 3664784 SheepDog-One
SheepDog-One's picture

My dad was a big bond trader in the 80's when I was a kid, he tried to explain bonds to me numerous times but I never understood what the fuck he was talking about at all.

Mon, 06/17/2013 - 11:00 | 3664804 Sudden Debt
Sudden Debt's picture

just try to explain it to joe average...

I recently got a answer that almost made me cry.... the answer was: "SEE, THERE'S STILL PEOPLE WITH MONEY!"


sure there are... there's even 1425 billionaires in this world. But nobody buys bonds with their own money.


Mon, 06/17/2013 - 11:01 | 3664809 hooligan2009
hooligan2009's picture

for the US government it's easy..they overspend..they borrow using bonds at an interest rate... just pay interest and never pay back what they borrowed....and if they try and borrow more than anyone has or the compunding interest gets too big, the Fed gives them cash for zero interest!!

corporates have a slightly bigger problem..all their bonds are unsecured, except for loans from banks..and they have to at least look like they can pay it back..corporates probability of default is equal to the yield spread plus a nice fat margin for the investors (banks) that lend the money unsecured.

you and I ..can only issue quasi mortgae bonds..and you are thrown out on the street if you miss three payments..unless you csn get a friendly PRISM operative to wipe your records clean..or you can get a HAMP from a fed/bank employee who doesn't get  afat bonus for losing your application form.

Tue, 06/18/2013 - 09:04 | 3667526 Bringin It
Bringin It's picture

hoolygun - I hear what you're saying, and basicly agree, except that you're leaving out the catastrophic finish part.

People will say all this newly minted claim on a fixed set of assets will not be a big problem because it's all parked somewhere.  It all gets parked somewhere static and doesn't join the competition for available goods.

This is how it always goes at this point.  But this phase is like Canute yelling at the tide.  It's a denial of nature, in the case of fiatskis, human nature, to say people won't try to paper over their issues, needs by deploying this stuff

"Sponsors of a potlatch give away many useful items such as food, blankets, worked ornamental mediums of exchange called "coppers", and many other various items. In return, they earned prestige. To give a potlatch enhanced one's reputation and validated social rank, the rank and requisite potlatch being proportional, both for the host and for the recipients by the gifts exchanged. Prestige increased with the lavishness of the potlatch, the value of the goods given away in it."

Anyways, it's human nature. <<-- I know it's wiki.  When swimming in a cesspool, sometimes you need to grab a turd.

Speaking of weath displays - I never see tv, but yesterday, on the road, I saw CNN claiming Putin punked some frat boy out of his multi-million$ ring!?!  Too funny.  On many levels.  Like WWF becomes nightmare news.

Mon, 06/17/2013 - 10:48 | 3664785 Headbanger
Headbanger's picture

They must have run out of ink again.

Mon, 06/17/2013 - 11:01 | 3664808 Sudden Debt
Sudden Debt's picture

must be all that gold that they're printing on those 100's...

also explains why there's no more left in fort knox...

Mon, 06/17/2013 - 10:50 | 3664789 Inthemix96
Inthemix96's picture

I wonder what the NSA and GCHQ will think of this breaking news?

Any of you NSA guys care to comment?

Fucking bitchez.

Mon, 06/17/2013 - 10:50 | 3664792 SheepDog-One
SheepDog-One's picture

Well at least booze is still somewhat affordable, however watered down....I plan on investing heavily in it over the coming days ahead.

Mon, 06/17/2013 - 10:59 | 3664803 Seasmoke
Seasmoke's picture

I already have and I feel more confident in it than silver. Plus if they avoid collapse and recovery lasts until forever, I will drink it all. The ultimate Hedge.

Mon, 06/17/2013 - 11:04 | 3664818 Headbanger
Headbanger's picture

Whiskey was the original "currency" used in this country as few had gold or silver to trade and printed money was of questionable value (like today!) This is why the more wealthy such as Washington and Jefferson had stills to produce copious amounts of rye whiskey to buy other goods and services.

Mon, 06/17/2013 - 11:35 | 3664921 otto skorzeny
otto skorzeny's picture

"The Whiskey Rebellion"- the first glance at the future of our Federal govt's boot on our throat.

Mon, 06/17/2013 - 13:00 | 3665182 Totentänzerlied
Totentänzerlied's picture

Stills run with good ol' fashioned freedom-lovin' slave labor.

Mon, 06/17/2013 - 10:53 | 3664797 Yancey Ward
Yancey Ward's picture

Maybe the Fed needs to stop buying up the Treasuries and buy something else- like munis?

Mon, 06/17/2013 - 11:04 | 3664816 hooligan2009
hooligan2009's picture

why not credit card debt and student loans..and give these debtors a zero interest rate so they can afford to pay back the loans?

Mon, 06/17/2013 - 11:18 | 3664841 unununium
unununium's picture

Half of the $85B/month right now is going to buy MBS from banks, no doubt at par. Maybe we should start a wager on the next asset to be bought with printed $. Some guesses:

- Halliburton stock (natl. security), Blackwater, etc.
- Inevitable massive FDIC injection
- FHA bailout
- PBGC bailout
- SS/Medicare bailout
- Total stock market bailout when PD's left holding the bag (wealth effect)
- Permanent total bond market bailout ( entire yield curve locked at 0% forever )
- Outright purchase of entire residential and commercial real estate supply at current prices using eminent domain authority

There will never be any inflation because we the people will just keep buying each other's used pots and pans from each other and learn to eat pond scum cake baked in the sun using recipes found on the Internet.

Mon, 06/17/2013 - 10:54 | 3664798 ebworthen
ebworthen's picture

Watching the markets float up over 1% this morning and the rosy talk on CNBC the recovery must finally be here.

This means the FED can announce the end of POMO and any other QE this week, right?

Mon, 06/17/2013 - 11:03 | 3664813 hooligan2009
hooligan2009's picture

up arrow - the fed will begin unwinding qe in your grandkids lifetime

down arrow - the fed will not unwind qe in your grandkids lifetime

Mon, 06/17/2013 - 11:33 | 3664907 SheepDog-One
SheepDog-One's picture

Sideways arrow---> Good luck on your grandkids even finding a part time shelf stocker job at Wal*Mart.

Mon, 06/17/2013 - 11:06 | 3664823 Sudden Debt
Sudden Debt's picture

would make sense :)

Now that would be some funny shit :)

Mon, 06/17/2013 - 11:04 | 3664817 Inthemix96
Inthemix96's picture

What if the Fed stopped buying Treasuries tomorrow and started buying chocolate buttons with them hundreds and thousands toppings on?

That would be mint in my opinion, $85 billion a month on a real tangible product that not even all you Americans could eat, you would have a veritable chocolate mountain after two months.

See?  Real progress could be made from this point on if we could make the Fed understand buying chocolate buttons with toppings on is the way forward.

And then when the chocolate mountain gets too big, sell the stuff you cant eat to the Mexicans, win fucking win all round, see once again I have solved the un-solvable, no need for the thanks, I do this as a public service at my own sacrifice to humanity.


Mon, 06/17/2013 - 11:55 | 3664994 Panafrican Funk...
Panafrican Funktron Robot's picture

This is a significantly more reasonable thing to do with the $85 billion than current state.  Well done pointing out just how absurd our situation is.

Mon, 06/17/2013 - 11:04 | 3664819 thatthingcanfly
thatthingcanfly's picture

I have no idea what any of this means. But I'm sure, somehow, it was Richard Jewell's fault.

Mon, 06/17/2013 - 11:14 | 3664848 MiltonFriedmans...
MiltonFriedmansNightmare's picture

BB's attention is focused on shawdow banking. He must taper, and soon, or repo freezes. He is between a rock and a hard place. Stawks will dive and a PD or two will be sacrificed, probably DB. The cover? War in Syria.

Mon, 06/17/2013 - 11:38 | 3664927 otto skorzeny
otto skorzeny's picture

Putin kept those bitches at the G8 waiting around for a while for him to arrive yesterday- I think he may be stepping up.

Mon, 06/17/2013 - 11:57 | 3665000 Panafrican Funk...
Panafrican Funktron Robot's picture

The funny part is that, if he tapers, "shit gets fucky" and repo demand will soar in excess of repo supply (even if he "tapers" to zero).  There is no way out of this but lots and lots of tears.  

Mon, 06/17/2013 - 13:41 | 3665295 lolmao500
lolmao500's picture

DB can't fail without bringing the whole thing down, it's too big.

Mon, 06/17/2013 - 11:28 | 3664885 nonclaim
nonclaim's picture

10Y is now a "bernanke special"

Mon, 06/17/2013 - 11:39 | 3664932 Missiondweller
Missiondweller's picture

Less 10 years available and less repo means a smaller shadow banking system and a monetary contraction right?

I don't think that's what the Fed is intending to do, but may be doing anyway.

Mon, 06/17/2013 - 13:41 | 3665291 lolmao500
lolmao500's picture

You know what's funny? It's that they are calling 10 years bonds as ``high quality collateral``... Funny shit.

Mon, 06/17/2013 - 16:08 | 3665800 Midasking
Midasking's picture

Excuse me I have to go take a "high quality collarteral" right back.

Mon, 06/17/2013 - 15:02 | 3665593 resurger
resurger's picture

I was putting a close eye on this topic since you first announced "REPO rates goes negative" in some articles..

How 7.7bn was enuff to push the repo rate from -3% to almost 0? Was the fed enriching the PD, is a taper coming? Twist is coming to an end?

We will soon know.

+5 on this analysis.

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