The last time the Treasury market saw a 2 year high surge in fails to deliver (approaching $130 billion), about a month ago [4], there was a furious shortage of Treasury collateral represented by a surge in "specialness" of 10 Year paper, which traded around the -3% fails penalty rate in repo indicative of collateral "desperation." This followed the hammering that the 10 year and especially the belly experienced, leading to a shorting scramble, and leading to the near record special rates. Then, following last month's 10 year 912828VB3 reopening, things normalized, as the Primary Dealers were allocated some $7.7 billion in 10 Year paper to satisfy margining requests.
Today, as per the latest ICAP data, the collateral shortage is back on, with the 10 Year moving from -0.10% in repo yesterday to 0.85% ahead of Wednesday's second re-re-opening of 912828VB3. But what is more curious is the repo shift, because while the On The Run shortage was to be expected with the 10 Year getting pounded to 2.75% on Friday, it was the 3 Year that saw a plunge in repo, with the repo rate soaring from -0.13% to -1.45%: ostensibly the widest it has been in our records database.
In other words, the collateral shortage just ahead of the 3 and 10 Year auctions is back and while the shortage of the 10Y OTR is somewhat more manageable than last month, it is the 3 Year, or the short-end, that is now in very short inventory supply.
[5]
Will this situation improve once again following tomorrow's and Wednesday's 3 and 10 Year auctions, or is the collateral shortage becoming a structural issue in what was once the world's most liquid market, at least until Bernanke came along, tune in two days to find out.
One thing is certain: with the Fed continuing to monetize ever more 10 Year equivalents across the curve until such time as it owns 40% of the entire bond market by the end of 2013, 50% in 2014, and so on, collateral shortages will increasingly become the norm, just as the TBAC warned two months ago.