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Five-Year Treasuries 'Special' As Safety Demand (or European Risk Aversion) Causes Collateral Shortage

Tyler Durden's picture




 

Andrew Brodsky of Stone & McCarthy notes that fed funds and repo rates declined from mid June through mid July amid increased excess reserves in the banking system and reduced collateral. Fears of exposure to European peripheral debt pushed money market funds into the repo market as they turned away from lending to euro-zone banks. In late July and early August, repo rates rose modestly from record low levels. The GC rate jumped to 42 basis points as investors began to pull out of the market and move into cash. Over the past few weeks, short-term rates eased in response to the resolution of the debt-ceiling debacle. The continued concerns over the global economy, European sovereign debt, and Bank of New York Mellon's decision to start charging fees on large cash deposits have spurred a demand for short-term Treasuries and repo. The increased demand for securities amid a shortage of collateral will continue to pressure rates.

This morning, the on-the-run 5-year issue continues to trade special. The issue is trading at -30 basis points after opening at -20 basis points. This could be supportive for Wednesday's $35.0 billion auction. All other issues are trading between 15 and 20 basis points, a bit higher compared to recent weeks, but basically in line with the General Collateral rate. The GC rate is trading at 20 basis points this morning, the highest rate since early August. The Fed funds rate has opened at 10 basis points since last Wednesday leaving the effective funds rate at 8 basis points through Friday.

The chart below depicts the General Collateral (GC) rate and the Fed Funds rate. After rising in late June and early August, both rates have drifted lower, until recently.

Chart: Bloomberg

With money market funds waving fees and unable to find any yield, we wonder how long before the NAV variation bands are widened and they become 'risky discount bonds' in all but name.

 

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Mon, 09/26/2011 - 12:46 | 1711740 GeneMarchbanks
GeneMarchbanks's picture

Reggie Middleton was right. The first to fail will see capital flight to the other contenders. No longer is this nations failing but continents. Chimerica lives to see another day.

Mon, 09/26/2011 - 13:23 | 1711868 trav7777
trav7777's picture

what I take from this is a couple things...one and most importantly, there is no yield anywhere anymore around here.

The second is that the Fed/banks are trying to chase the excess reserves out of reserves and into something else and the goal seems to be to fund the USG deficit with that.  This might mean BB can get away with no QE for a lot longer than expected because there were about a year's deficit worth of dollars parked in excess reserves.

Mon, 09/26/2011 - 15:03 | 1712347 slewie the pi-rat
slewie the pi-rat's picture

of course

bingo!

i've been trying to tell people this since tyler went ape-shit abt (LSAP?) QEIII in early august

there are so many "fantasies" regarding "what must happen next" from the mythology types like ori, the uber 'myth-othodox' falak penis, and those whom god had addressed, direcly and given "visionary truth" like "spirit of truth" and all their little bands of "friends" here as to make serious, rational discourse almost impossible

those of us who know the need for anonymity in these troubled times will note that none of  these asshats are anon-i-mouse and seem to have "businesses" which consist of scaring people who can't think straight and then "foretelling the future" for them

thanks for not binging "peak oil" into this, trav, and the rest of this isn't addressed to you, personally:

there is also the idea being www'd that the chairsatan has "gone enron" w/ stealth, off-balance sheet printing...

also: this "deflation" may be "just the ticket" for merkel's political purposes in "saving the EU by sacrificing germany"...

...the swiss SNB's "devaluation" act is one of the biggest central Banksters' co-ordinated attacks on wealth and autonomous political control in history

the idea that nations and their peoples MUST re-capitalize the financial institutions which are oppressing them politically and economically and throwing all civil discourse into bankster-advantaging confusion, didn't work in the USA, and should be challenged by clear-thinking citizens everywhere

LET THEM FAIL!!!   tell ms. lastrage lagarde to go sit on it!  if they failed, they fuking failed.  they gambled and lost.  shit happens!  stop giving them more of your money & wealth to fuking gamble with!

if the regulatory jackasses who let them become "too big"  just keep making them bigger, WAKE THE FUK UP AN LET THE CHIPS FALL BEFORE YOU LOSE ALL YOUR WEALTH AND ALL YOUR POLITICAL RIGHTS TO THE NWO

stop buying into their non-stop lies;  the answer is simple:  STOP!  let them fail and fall.  banks, nations, corporations, all the fascist power centers are NOT Real economically and are based on lies, fear, and misplaced "trust"

trust me!   L0L!!!

Mon, 09/26/2011 - 12:45 | 1711742 Caveman93
Caveman93's picture

"Special Needs"....all I have to say on that one.

Mon, 09/26/2011 - 12:46 | 1711744 papaswamp
papaswamp's picture

This could put the fed in a serious pickel....

Mon, 09/26/2011 - 12:49 | 1711749 Caveman93
Caveman93's picture

I love Pickles!  Quick Banzai! Sweet Pickles Van with Ben driving it!

Mon, 09/26/2011 - 13:30 | 1711895 DCFusor
DCFusor's picture

Actually, it seems like the fed will have no trouble selling shorter term T's high so it can do op twist.  That's a nice tasting pickle indeed (for them).  Just as pulling the plug on PPT caused a stock crash and a rush to bonds to help keep govt interest down -- maybe they aren't so dumb (short term that is).

Mon, 09/26/2011 - 12:48 | 1711748 gorillaonyourback
gorillaonyourback's picture

so it costs money to hold money,

wish i had 15 billion id gladly loose a little to insurance and generalm operating expenses

Mon, 09/26/2011 - 12:50 | 1711750 Caveman93
Caveman93's picture

It's normal SOP's...we call them ..."Bank Fees". 

Mon, 09/26/2011 - 13:25 | 1711873 trav7777
trav7777's picture

banks used to use repos to generate yield off that cash.  They apparently cannot anymore as everything is dragged to ZIRP.

the ONLY things reliably paying any yield now are USTs.

Mon, 09/26/2011 - 12:51 | 1711753 Sophist Economicus
Sophist Economicus's picture

Hence B's move to the long-end of the curve, the short end will take care of itself, for the time being....

Mon, 09/26/2011 - 14:52 | 1712313 beaker
beaker's picture

RE US/Z1 - did we just have an exhaustion gap, outside reversal, gap down TOP????

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