US Treasury Admits Collateral Problem In Bond Market; Considers Issuing Ultra Long-Dated Bonds

Tyler Durden's picture


We noted yesterday once again that The Fed was out en masse demanding investors sell their bonds because "bonds are in a bubble" but not stocks. The reason - as we have explained in great detail - is the repo market is broken due to massive collateral shortages (thanks to the Fed). Today, the Fed admitted it has a problem...


The tongue in cheek message of course is that the Treasury wants to know why all the dealers continue to be so short bonds (even as it urges 'investors' to sell). Furthermore, it is surveying dealers over the need to issue bonds of greater maturity than 30 years in order to fulfill collateral needs.

Via Bloomberg

The U.S. Treasury Department is asking bond dealers whether it should consider issuing a security with a maturity exceeding 30 years.


“Please comment on the demand for long-duration sovereign products,” the department said in a quarterly survey of dealers released today in Washington. “Should Treasury consider issuing a security with a maturity greater than 30 years?”


The Treasury also asked the dealers to explain the causes for an increase recently in “fails-to-deliver” in the market for U.S. government debt. The survey was released ahead of meetings planned for July 31-Aug. 1.

As we explained previously, there is a massive collateral shortage worldwide thanks to massive central bank purchases...

*  *  *

But why do I care about some archaic money-market malarkey? Simple, Without collateral to fund repo, there is no repo; without repo, there is no leveraged positioning in financial markets; without leverage and the constant hypothecation there is nothing to maintain the stock market's exuberance (as we are already seeing in JPY and bonds).

Crucially, it should be inherently obvious to everyone that the moves we see in the stock market is not about mom and pop choosing to invest in the stock market (or not) as the 'cash on the slidelines' fallacy is "completely idiotic' but about the marginal leveraged machine (or human) quickly jumping oin momentum.

The spike in "fails to deliver" highlights a major growing problem in the repo markets that provide that leverage... and thus the glue that holds stock markets together.

Wondering why JPY and bond yields have diverged so notably from stocks in recent days... repo effects (it's just a matter of time before it hits stocks)...


So that explains why the Fed is so desperate to talk you into selling your bonds - most notably the short-end by demanding you listen to what Yellen said about raising rates.. as that reduces the shortfall of collateral that repo needs and restocks the banks with repo-able funds.

*  *  *

Is that why a noted dove like Jim Bullard was so visibly hawkish last time?

The irony of course of the Fed explaining how rates will rise faster is that it spooks stock investors who have grown used to exuberant liquidity supply and roitates them to bonds... which merely exacerbates the problem the Fed has

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Fri, 07/18/2014 - 12:22 | 4973858 NoWayJose
NoWayJose's picture

Plenty of 'naked shorting' of selected stocks in the stock market - and the SEC turns a blind eye to those even if they are supposed to be delivered at settlement -- so why should we be worried about failure to deliver some bonds?

Fri, 07/18/2014 - 12:23 | 4973867 BC6
BC6's picture

This should help auto sales assuming they release a 30 year car loan.

Fri, 07/18/2014 - 12:27 | 4973897 Bossman1967
Bossman1967's picture

We would need a 30 year note with the price of a nice car.a mustang loaded 80,000 a vette 80,000 Porsche 175,000 unbelievable but if they do a 30 year note then the takers will buy

Fri, 07/18/2014 - 12:35 | 4973940 slightlyskeptical
slightlyskeptical's picture

30 year loan....get an updated model every 7.5 years.. 4 cars in awesome would it be to get paid for a car you don't have to deliver for another 20+ years?

Fri, 07/18/2014 - 12:46 | 4973991 nope-1004
nope-1004's picture

Ahhhh.  The smell of failed credit markets in a debt based economy.  "Pour more gas on the fire to put it out!"


Fri, 07/18/2014 - 13:05 | 4974116 CrazyCooter
CrazyCooter's picture


“Should Treasury consider issuing a security with a maturity greater than 30 years?”

Who in their right mind would load up on > 30 year US Govies at this point in time? Why not stop this BS song and dance and just issue them with a negative coupon rate! Investors would love it because they are fucking retarded these days ... negative is the new positive!



Fri, 07/18/2014 - 13:41 | 4974333 max2205
max2205's picture

60 year bonds should go for ....say 3.7%.....BWWWWAAAA!

Fri, 07/18/2014 - 14:11 | 4974505 Arius
Arius's picture

Funny how shy these Wall Street guys are ....

I would have thought they would go to the Treasury and ask them what they need them to do and not the other way around ....

some concerned public servant making 50 or 60 thousands a year goes all the way to NY to ask them Que problema amigo???

What these guys take us for?  complete stupidos? this is insulting to the intellegence of the common man if there is such a thing ...

i guess nobody thinks they just read and repeat what they read ... ohhh welll..

Fri, 07/18/2014 - 15:43 | 4975003 knukles
knukles's picture

Abso-fucking-lutely unprecedented display of dirth, barren financial knowledge.  None, zip, nada, zilch.... Fucking pitiful.

A 1,000,000 year bond, a 3 year note, 6 month t-bills.... the maturity has fuck all nothing to do with availability for collateral standards.

It's a supply in loanable hands issue.
Can you borrow it?  If not, you fail if you don't own it.
Who's got all the bills, bonds and note in their inventory?
The Fed.
Start a securities lending program.

No, not some crap about reverse repos, etc., but a real honest to God lending program.

Fucking Idiots


And these are supposed to be the people understanding this shit



Sat, 07/19/2014 - 11:04 | 4976882 IANAE
IANAE's picture

It would appear this is the Fed attempting - yet again - to get in front of the impending tsunami by shaping the conversation and assigning presumptive ownership for what is now occurring.

Their models must be unable to identify what is causing this anomalous behavior...guess they need moar explanatory variables/models to enhance the view from the ivory tower.

Perhaps it's a macroprudential regulatory issue.

Fri, 07/18/2014 - 13:56 | 4974427 daveO
daveO's picture

No one wanted 100 yrs., back in the 90's, when debt levels were lower.

Fri, 07/18/2014 - 14:26 | 4974609 Urban Redneck
Urban Redneck's picture

What quota monkey at Treasury thinks the current collateral shortage would in any way be mitigated by the issuance of ultra long term debt, or that that is a remotely acceptable or appropriate lie/cover story?

Fri, 07/18/2014 - 13:55 | 4974416 daveO
daveO's picture

I'm still amazed at how they conned so many into leasing. Of course, 2 of them went broke doing it.

Fri, 07/18/2014 - 12:40 | 4973955 Stoploss
Stoploss's picture

Why doesn't the FED just go ahead and sell tickets to the short covering???

They might be able to buy two or three after it's over..

Fri, 07/18/2014 - 12:28 | 4973906 madbraz
madbraz's picture

Excellent point.  Why isn't the SEC or the FBI prosecuting anyone who is 'naked shorting' US Government bonds?  Could it be because the NY FED is the one providing collateral to the parties engaged in this activity?

Fri, 07/18/2014 - 12:34 | 4973926 madbraz
madbraz's picture

To give you an example, an everyday occurrence.  Today, at 11:55 yields on long-dated US treasuries started moving up, a total of 2 basis points in 20+ minutes.  This move was almost symetrical, like steps in a stair.  The same was observed in the stock market index, who performed a well choreographed 45 degree steady climb with constant volume during that time.


The time it happened "coincides" with the NY FED securities lending operation - where they lend treasuries to primary dealers.


The same type of reaction usually occurs during reverse repos, from 12:55 to 1:30PM.  Wouldn't be surprised if it happens again today.

Fri, 07/18/2014 - 12:34 | 4973932 maskone909
maskone909's picture

serious question


is naked shorting illegal?  so i cant go sell calls that arnt covered?  or puts for that matter too?



sorry i never trade options

Fri, 07/18/2014 - 13:22 | 4974215 bonin006
bonin006's picture

It's not illegal, but you would need demonstrate a high level of financial resources to your brokerage firm to get approval, as they would be responsible to cover if you couldn't. (naked shorting may be illegal, but not selling uncovered calls)

Fri, 07/18/2014 - 13:30 | 4974242 pakled
pakled's picture

Last time I looked, NO. You can do so in the futures market. And there is options trading on those futures as well. I haven't traded in a while though, so not up any rule changes.


What I am trying to figure out is what these ZH articles mean by "fail to deliver", which is one piece of the food chain. Is this a failure to deliver in the futures market, where a contract comes to expiration, the long side of the trade demands delivery (instead of liquidating the position), and the short fails to deliver?

Or are we talking about fail to deliver in a different context?


Fri, 07/18/2014 - 13:41 | 4974329 Killer the Buzzard
Killer the Buzzard's picture

Dear pakled... you are smaaaart.

Fri, 07/18/2014 - 13:49 | 4974386 pakled
pakled's picture

LOL. But not smaaaart enough. I'm hoping to lure some of the bond traders that lurk here to explain some of the details of this collateral food chain. ZH sometimes speaks over the heads of folks who don't live in these markets. No one understands financial markets better than bond traders. 

Fri, 07/18/2014 - 12:35 | 4973938 Hippocratic Oaf
Hippocratic Oaf's picture

And Janet is holding up this entire house of cards?


Fri, 07/18/2014 - 14:00 | 4974452 dead hobo
dead hobo's picture

Woo Hoo! Hallelujah! I'm an old guy who no longer wants to risk my life savings in stocks. If this becomes a real problem then the Fed will have to sell some bonds. This will cause rates to rise and finally allow me to have the retirement I deserve. 

Fri, 07/18/2014 - 12:23 | 4973861 markelshark
markelshark's picture

WWIII beginning. Stocks rally.


Reading financial news has become funnier than the Onion's satire. 

Fri, 07/18/2014 - 12:23 | 4973862 pods
pods's picture

So is everyone on the same side of the bond boat?


Fri, 07/18/2014 - 12:24 | 4973872 slaughterer
slaughterer's picture

Toilet paper and candy bar wrappers should be accepted by the Treasury as collateral -- easier to deliver than T-Bills and more reliable. 

Fri, 07/18/2014 - 12:24 | 4973877 Bossman1967
Bossman1967's picture

What a game of cat and mouse. The rehypothication of this countries debt and making look like money is amazing. Wonder if I can Rehypothicate my money and not go to jail?

Fri, 07/18/2014 - 13:33 | 4974284 pakled
pakled's picture

No Boss. You would go to jail. You would go directly to jail.


All the 'get out of jail free' cards have already been distributed.

Fri, 07/18/2014 - 13:48 | 4974364 Bossman1967
Bossman1967's picture

then obumer can give me one and I'm off to the races!

Fri, 07/18/2014 - 14:50 | 4974718 TheRedScourge
TheRedScourge's picture

Just ask for a special dispensation, and he'll be happy to oblige.

Fri, 07/18/2014 - 12:26 | 4973887 madbraz
madbraz's picture

You shouldn't read it as the US Treasury "asking" the primary dealers for explanations, it reads much more like the US Treasury asking what the primary dealers want them to do to fulfill their own trading objectives.


Why aren't they asking institutional holders what they want?  I mean, they are the only ones who hold this paper long term.  


Why would you ask the parties that short the government bonds your issue?  It's like the lamb asking for advice from the wolf....

Fri, 07/18/2014 - 12:26 | 4973889 Seasmoke
Seasmoke's picture

100 years.  ..... it's time we hit triple digits. 

Fri, 07/18/2014 - 12:38 | 4973951 NotApplicable
NotApplicable's picture

Now that would just be plain crazy. Gotta go with 50 first, as the financial sheeple require baby-steps in order to maintain confidence.

I've been waiting for this day to come for years. ZIRP absolutely demands it.

Fri, 07/18/2014 - 12:59 | 4974075 Amish Hacker
Amish Hacker's picture

Fifty- and hundred-year bonds are for pikers. Go with the British "consols," which are perpetual bonds, i.e. they pay interest forever, but never mature. An easy way for a government to borrow money without ever having to pay it back.

Fri, 07/18/2014 - 12:40 | 4973958 optimator
optimator's picture

Can't have anything legal over 100 years.  Only one exception to that, the FED mandate which is "In Perpetuity".

Fri, 07/18/2014 - 12:47 | 4973994 1stepcloser
1stepcloser's picture

lets try them in mortgages first

Fri, 07/18/2014 - 12:26 | 4973891 GrinandBearit
GrinandBearit's picture

But the algos DON'T CARE, so it doesn't matter.

Fri, 07/18/2014 - 12:27 | 4973895 JRobby
JRobby's picture

Funny how these little "technicalities" keep tripping up this massive manipulation scheme isn't it?


Fri, 07/18/2014 - 12:32 | 4973899 Quinvarius
Quinvarius's picture

Everything the Fed did was good for stocks until they crossed the top of the bell curve.  There are no good levers left to pull.  They all have bad consequences now.  If they want money in the system, they have to print it.  They cannot stand behind the scenes and pull strings.  They must get on the stage and dance.  They must directly participate.

Fri, 07/18/2014 - 12:41 | 4973966 NOTaREALmerican
NOTaREALmerican's picture

Wow,  from a Kabuki show to a chorus line.   That would be quite change. 

Fri, 07/18/2014 - 12:28 | 4973903 Gringo Viejo
Gringo Viejo's picture

The 1,000 year treasury bond @ .50%. LMAO.
These sociopaths just won'quit.
Stop it. You're killin' me.

Fri, 07/18/2014 - 12:43 | 4973977 rum_runner
rum_runner's picture

seriously.. the alternating laughing and crying I do as the news comes in is making me think i'm bipolar.

Fri, 07/18/2014 - 12:28 | 4973904 Winston Churchill
Winston Churchill's picture

Too much currency chasing too little value in shorthand.

They will have to force the US banks(or pension funds) to take the long end notes.

Anybody with any sense, is standing by the emergency exits at the short end.

Fri, 07/18/2014 - 13:07 | 4974132 gcjohns1971
gcjohns1971's picture

Why don't they simply use them for the SS Trust Fund, and then mark them to fantasy when the bond market explodes?

Fri, 07/18/2014 - 12:33 | 4973920 moneybots
moneybots's picture

"So that explains why the Fed is so desperate to talk you into selling your bonds - most notably the short-end by demanding you listen to what Yellen said about raising rates"


Why should anyone listen until the FED actually raises the rate?  As some say here, the FED will never raise rates.

Fri, 07/18/2014 - 12:41 | 4973961 buzzsaw99
buzzsaw99's picture

if the fed raises rates demand for short dated Ts will INCREASE. what they want is bagholders for the stock market. they should just point a gun at us and force us to buy stock.

Fri, 07/18/2014 - 12:47 | 4973998 Dollarmedes
Dollarmedes's picture

Nah, too complicated. Just confiscate our money (for the children!!!).

Fri, 07/18/2014 - 12:35 | 4973931 Devils Advocate
Devils Advocate's picture

Interesting, Why doesn't the fed just start selling their bonds!!!!! LOL

Fri, 07/18/2014 - 12:47 | 4973997 buzzsaw99
buzzsaw99's picture

^^^lmao funny shit there^^^

Fri, 07/18/2014 - 13:12 | 4974166 mt paul
mt paul's picture

because they have rehypothicated them

a few too many times...

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