"We've Never Seen Anything Like This": Repo Market Snaps As 10Y Suffers "Epic Fail"

Tyler Durden's picture

It's been a while 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, at a rate of 0.50% on Friday, to a special -2.00% on Monday, and then a Super Special, if not record, "fails rate" of -3.50% this morning.

Commenting on this dramatic move in 10Y repo rates, Stone McCarthy's Alan Chernoff, in a note titled "Epic Fail", writes that "the 10-year note has been below the fails rate and shows no signs of moving! It opened at -350 basis points, and though pressure has eased off of it slightly, it is STILL below the fails rate at -300 basis points."

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 agency repo fails nominal was at $131BN on  Sept. 6 vs $153.6 BN on Sept. 5, above the 5-DMA $90.7b, according to DTCC data.

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."

No matter the reason, Chernoff observes that he has never seen a move quite like this and that "this is one of the lowest rates that we've ever seen the 10-year note repo trade at, and definitely the furthest below the fails rate."

One final observations: while even term 10-year repos are below the fails charge at -215 basis points, the 3-year note is only modestly tight at 65 basis points, while and most other issues are trading near GC.

Some final parting words: keep a close eye on the 10Y - a positioning move of this magnitude does not take place in a vacuum, and either "someone knows something" or another busload of specs is about to be crushed once more.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Newsboy's picture

Naw, not already. The Oil/gold/Yuan financial regime can't start YET!

Haus-Targaryen's picture

Articles like this is why I keep coming back to ZH day after day after day.  

Just about the time I get a certain arrogance about me, and "I know it all" along comes this, which might as well be Greek, and I am humbled. 

Thanks Tylers for teaching me a thing or two and keeping my ego in check.  Its greatly appreciated. 

NoDebt's picture

They're hoarding USTs in preparation for the hurricane.

"Can I have my UST back now, please?"

"No, fuck you.  Here's your 3 pennies for a busted repo, now go away."


knukles's picture

Years ago one of our operations was required to post UST bills on governmental deposits.  Wasn't at all uncommon in them thar old days.  And very late, minutes before the Fed wire closes, the custody area calls in a panic and needs some specific bills. 
So I search around with the proviso of Must Make Delivery, and only Salomon made an offer.  Which I took.  I call the cage tell them and send the ticket right over.
Shortly thereafter, the cage calls.  Where're the fucking bills you bought?  The Fed wire ain't gonna git kept open all day, Bozo.
So I call Solly.  No gots, no deliver. 
I said I toldja I needed the paper toot sweet. 
Tough.  Not sorry, Tough!
So I bought Salomon in at a premium.
That's right.  I bought Salomon in, paying a premium for Treasury Bills.  BTW, buying them in means that I have the paper and they owe the other guy the difference.

"I don't get no respect"

Pool Shark's picture

Here's the Reader's Digest Condensed version:


Buy: Cash, Bonds, Gold

flea's picture

Methinks Tyler is an ex-bond dealer dude.

knukles's picture

He's a Bond Guy
Kinda like saying there's a God.

yogibear's picture

Federal reserve can print 10s of trillions to buy the treasury with Yellen QE.
Then like magic make the debt disappear.
Zimbabwe American style.

Winston Churchill's picture

it starts the moment those Sino Russian pipelines start pumping.

Trying to get good intel on that is like auditing the nerve gas at Ft.Knox.

stant's picture

Bluegrass army Depot at Richmond. The public service announcement on the Lexington tv channels about it seems more of a threat than helpfull

Jim in MN's picture

Couldn't have happened to a nicer bunch of...


Soul Glow's picture

The Fed will fix it.  It isn't like the Fed President's/VPs are bailing out on their obligations or anything....

buzzsaw99's picture

janet has three bags full so don't get too excited.  long term, this changes nothing.  the 10Y is heading for sub 1% yield whether you believe it or not.

Bay of Pigs's picture

Fwiw for the newbies at ZH, buzz has been correct on this call for several years running now.

buzzsaw99's picture

my gold bashing has been epic wrong so far this year so don't bet any money on what i say.  like many here say, why not both?

Pool Shark's picture

Bonds and Gold BOTH do well in deflationary recessions.

Anyone who thinks that gold is an INFLATION hedge needs to explain why gold went from $850 to $200 between 1980 and 2000 with inflation raging the entire time.

Gold LOVES deflation and recessions...

buzzsaw99's picture

my thinking is clouded by the "there can be only one" meme.  i still have until dec 30, 2017 for my call to be correct but gold has to fall a long way for that to happen.  bitcoin action has me seriously doubting my own logic concerning gold.

Pool Shark's picture

Frankly, it's nearly impossible to pick the "Bubble Du Jour," but history has proven time and time again that in times of crisis, cash, bonds and gold do very well.

Additionally, there is currently so much debt in the system, it will soon be difficult/impossible for Joe 6-Pack to service his debt. At a minimum, debt creation is destined to slow down, which brings the Ponzi to a screeching halt.

When debt creation slows, there will be a "Hunt for Liquidity" to service debt: assets have to be dumped to raise cash.

Buy things that are in short supply. Right now, CASH is in short supply; 40% of the population can't even come up with $400 for an emergency. When the next recession hits (I know, we never left recession...) there will be an asset fire-sale (even bigger than 2009), and those with no debt who are holding cash, will be like kids in a candy store...


rccalhoun's picture

BTC (crypto) is the new gold. 

Pool Shark's picture

Gold is the New Gold

BitCoin is the New Tulip Bulb

assistedliving's picture

and if the yuan craters buzz, and i think it will...cover now!

as for shitcoin, Allah only knows when that tulip wilts.

full disclosure :  the wife and son both own tulips while I stockpile Au/Ag and get laffed at daily

Squid-puppets a-go-go's picture

buzz, they'll converge. Some heavy hitter like china will link/back gold to a dominant crypto to reinforce the highlander thesis

Clowns on Acid's picture

Gold loves stagflation..... is what I think you are describing...

Withdrawn Sanction's picture

"Gold LOVES deflation and recessions..."

It should, so long as it's money, and for a lot of people it is. Money becomes more valuable in a deflation for the same reason that it becomes less valuable in an inflation.   It's value is always measured relative to the values of what it can buy.  

Typically in deflation, it is time value assets (stocks, bonds, real estate, etc.) that lose value relative to money (financial asset prices are deflating).  They lose value because, on balance, they are being sold thereby driving down their prices.  And once sold, what do the sellers receive?  Money. 

So money need not absolutely appreciate for it to gain value.  Only the things that money buys need to lose value faster than money does for money to gain on a relative basis.  

The irony of all this is the Fed's negative real rate policy is aggravating the very deflation they say they want to avoid.  

TheRedScourge's picture

Gold is a deflation and hyperinflation hedge.

Not My Real Name's picture

"Anyone who thinks that gold is an INFLATION hedge needs to explain why gold went from $850 to $200 between 1980 and 2000 with inflation raging the entire time."

What are you talking about? Inflation was raging in the 70s. Remember WIN (Whip Inflation Now)? Volcker being forced to raise interest rates into high teens started in the late 70s as a last ditch response to break the back of inflation? FFS, the inflation that occurred between 80 and 2000 was child's play ...

Oh ... and while all of that inflation was raging in the 1970s, gold rose from $35 to $800.

The bottom line is gold loves deflation AND inflation.

yogibear's picture

Gold is the krytonite of western Central banksters.

Squid-puppets a-go-go's picture

with the exception that the oligarchs position themselves to 'flip the switch'. Unless, of course, its been solong since they flipped the switch that they've no longer remembered to position themselves...

Clowns on Acid's picture

Not if they lift the debt ceiling but also have the Fed reverse QE (over a 3 year period...yada yada) . From Goldman to JPM...they all know that they have to "normalize" the yield curve or disaster (global)  is not very far away.

How to normalize? See above. Now if you are talking about "real" interest rates ....its a different story.

wisehiney's picture

I need to raise some funds to buy precious.

If you will just bid 130 for this TLT I am holding here.

I will relieve you of your suffering.

And take my dump truck down to the precious metals shop.

Pool Shark's picture

The problem is, I want Treasuries AND Gold

[Edit: Wow, 10-year down to 2.04%; so glad I started buying around 2.40%...]

Place your bets: 10-year headed to ZIRP or maybe even NIRP...

(We are ALL Japan now.)

[2nd Edit: 10-year down to 2.03% and falling...]

buzzsaw99's picture

130?  you aren't even being greedy.

JoeTurner's picture

"Black Swans...Black Swans Everywhere !" - Buzz Lightyear

buzzsaw99's picture

to zirpfinity and beyond! [buzz kuroda-draghi]

onthedeschutes's picture

Epic Fail, Debt Fail, Fiat Fail, Empire Fail...the word fail spruces up many a headline

buzzsaw99's picture

the fail is especially strong among the bond shorts these days.  lolz

DrDinkus's picture

the fail rate is actually -200, as it is 300 bps thru the discount rate...got as hot as -3.50 today, so 450 thru the disco rate...madness. more pain ahead.

Consuelo's picture



Repo man...

spastic_colon's picture

looks like the "safety" trade into equities is on.........../s

hooligan2009's picture

some dots to connect

us debt clock hqs not hit 20 trillion, in fact has been stuck at 19.8 trillion for months

us fiscal deficit is around 75 billon per month

the us will raise its debt ceiling on a time dependent basis, rather than an amount dependent basis.

.. http://www.usdebtclock.org/

my thinking - the us government needs to borrow aorund 400 billion in the next two months - probably in the ten year

dot dot dot

Pool Shark's picture


Buy what the Banksters are buying, and what the Banksters have to buy...

Ink Pusher's picture
           US 10Y Yield 2.039 -0.067 -3.20%  

US 30Y Yield

2.658 -0.065 -2.39%       US 2Y Yield 1.266 -0.040 -3.06%       US 5Y Yield 1.622 -0.064 -3.81%    


jamesmmu's picture
Department Stores Sales Have Gone Deep South, The Debt-Fueled Auto Boom Is Rolling Over…


Argos's picture

Would someone care to translate this into English?  I don't speak financial gobbledygook.

Pool Shark's picture

The so-called "smart money" was shorting treasuries (betting that yields would rise). Instead, yields have fallen, and the "smart" money was forced to panic-buy treasuries to cover their bets. Essentially, it was a treasury 'short-squeeze.'

Clowns on Acid's picture

It ain't gobbly gook. Go to google and learn how repo is used. Here is a hand out...

Repos are the same as borrowing shres when one ios short an equity. Remember that when one sells somehting they don't own...(going short) they have to "borrow" that bond from someone who owns the bond, in order to bve able to deliver the bond that they sold to the buyer (Clearing House handles this).

The short seller borrows the bond in the repo market for what ever period they choose (typically overnight to 1 week) and they pay / receive the "repo rate".

The article describes a situation where the market is sooo short the 10 yr bond (on spec) that the repo rates are at historic lows (actually highs given the fact that they are paying pts for repo rather than receiving pts).

Thus the author says that either someone knows something ...(thats why the specs are sooo short), or that they are about to get crush_ola'd. 


Withdrawn Sanction's picture

Dont forget, the repo (and reverse repo) market is also where the Fed operates to add or drain liquidity from the system.  Although it usually works such magic at the short end, dont dismiss those merry pranksters having a hand in this since their QE pixie dust is all over the yield curve.