Yesterday, after the impressive 30 Year auction [8]which as we explained performed as well as it did, due to a persistent short overhang resulting in a -0.35 bps repo rate, we noted something concerning: using SMRA data, we showed that benchmark 10Y has been trading negative in repo virtually all of 2015.
10Y is negative repo pretty much constantly now pic.twitter.com/TBrcfZ4b97 [9]
— zerohedge (@zerohedge) June 11, 2015 [10]
One day later, the shortage has gotten out of hand as following the Wednesday 10Y auction and ahead of its Monday settlement, there is not an On The Run cash bond to be found as all of them have been either removed from the repo market, or have been shorted.
From SMRA [11]:
The 10-year note is trading even tighter today than it was yesterday. At -220 basis points, this is the tightest that the 10-year note has been since April. After the auction settlement Monday, the current 10-year note will become the off the run 10-year note. If it maintains this much pressure it result in an extremely tight off the run 10-year issue again. The new 10-year note will likely trade near the GC rate.
Indicatively, today's shortage is massive, and putting it in context, there have been only two previous comparable squeezes in the repo market: one year ago, and in April when the 10Y was trading at its tights of the year well under 2%.
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Recall a few months ago, when a comparable gold collateral shortage hit unprecedented levels, the LBMA decided to simply do away entirely with the GOFO metric which measures physical gold scarcity, thus avoiding hinting at how big a potential squeeze in gold could be if the shorting central bank (mostly the BOJ these days [14]) were to be caught out.
As for US Treasuries, at some point this huge short will be cleared out with a violent reaction in the underlying one way or another.
However, while we know now just how substantial the shorting activity in the 10Y is, a better question is who is behind it: hedge funds or central banks. If the letter, don't expect to find out - just like PIMCO, central banks can just "sell" to themselves without ever touching, and disrupting the market. If it is someone else who can't print money, then it may get very interesting soon.