The last time the US Treasury had a solid 2Y auction the paper was trading very special in repo, suggesting a major short squeeze was inevitable, and that is precisely what happened. However, there was no explanation why today's just concluded sale of $26 billion in 2 year paper was as blisteringly hot as it was.
Never before have central bankers done so much to achieve so little... and yet they continue to propagandize more of the same...
We had a feeling there would be a squeeze into today's 3Y auction after this morning reports of that the OTD was trading tight, and quite "special" at -0.5% in repo, traditionally indicative of a notable lack of deliverable and underlying on the day of the auction. The repo market is also why just before the auction we wondered if there would be another tradtional repo-driven squeeze into today's auction. And, sure enough, just moments later we got confirmation of precisely such a squeeze because the $24 billion in 3Y paper which according to the When Issued was supposed to price at 0.89%, instead printed at 0.875%, stopping through the WI by a whopping, for this tenor, 1.5 bps.
An afternoon sell-off in GC pushed overnight rates (on quarter-end) as high as 1.75% and the market ended closed at 1.75%. Drumroll please! The 1.75% rate was the highest GC Repo trade since September, 2008.
The one chart that summarizes what is going on is shown below: as of this moment, there are more "failures" both to deliver and receive than just one time in history, June 2013.
With China's Plunge Protection Team having intervened and set a positive spin on another poor session, traders put declines in Asia behind them as European markets rose along with U.S. index futures and commodities. European shares advanced for the first time in three days on speculation the region’s central bank will ramp up monetary stimulus on Thursday. A gauge of raw materials rebounded from its biggest selloff in a month, buoyed by gains in oil and copper. Furthermore, the previously noted selloff in Japanese government bonds - one which triggered circuit breakers and which some speculated may have been precipitated by the BOJ itself - dragged Treasuries and German bunds lower, gold fell a second day and the euro dropped versus most of its major peers.
US financials are tumbling after The Fed proposed a rule that would limit banks with $500 bln or more of assets from having net credit exposure to a “major counterparty” in excess of 15% of the lender’s tier 1 capital. Bloomberg reports that The Fed's governors plan to vote today on the proposal. The implications of this are significant in that it will force some banks to unwind exposures and delever against one another (most notably with potential affect the repo market which governs much of the liquidity transmission mechanisms). Guggenheim's Jaret Seiberg warns the proposal is likely to be "stringent," though less onerous than the Dec 2011 proposal... which Goldman Sachs more specifically warned that it could destroy 300,000 jobs.
As of this morning, whether it is due to shorting or not, there has never been a greater shortage of 10Y paper at least as demonstrated by what just happened in the repo market where the 10Y, according to ICAP unit GovPX, hit a whopping -2.90%, or just shy of the fail rate!
The recent sharp spike in TSY yields has prompted rates traders to wonder if the selling was organic, if somewhat panicked, unwinding of long positions or just an influx in new shorts, whether due to macro considerations or as rate-locks as a slew of new Investment Grade issuance comes to market. Courtesy of Stone McCarthy and Credit Agricole, both of whom point out our favorite repo market "stress" indicator, the "specialness" level of the 10Y, we now have the answer.
The real pity is that the busts and crackups could all have been avoided if central bankers recognized that falling prices eventually create the conditions for a normal economic revival. Deflation is not a death spiral as the Keynesians believe. Nevertheless, expect more central banks to follow the early leaders — Switzerland, Sweden, Denmark, and even the European Central Bank itself — into negative interest rate territory. The crying shame is that it will not work and will cause great harm to hundreds of millions of people.
As if several markets tumbles and heartstopping short squeezes in just the first two months of 2016 have not been enough to turn professional traders' hair prematurely gray and drive all retail daytraders permanently out of the "market", here is a warning from Wedbush's otherwise quite somber repo market analyst, Scott Skyrm, according to whom the volatility is only just starting.
Investment expert, Harry Markopolos, wrote detailed letters to the SEC for years, raising red flags that Bernie Madoff was running a Ponzi scheme – only to be ignored by the SEC as Madoff fleeced more and more victims out of their life savings. Today, there are two equally erudite scribes who have jointly been flooding the SEC with explosive evidence that some Exchange Traded Funds (ETFs) that trade on U.S. stock exchanges and are sold to a gullible public, may be little more than toxic waste dumped there by Wall Street firms eager to rid themselves of illiquid securities.
The Fed may have officially tapered QE at the end of 2014 but that doesn't mean it is done buying Treasuries: since the Fed never ended rolling over maturing paper, it means that it will remain indefinitely active in the open market. And while there were no sizable maturities from the Fed's various QEs to date (only $474 million in 2014 and $3.5 billion in 2015) that will change dramatically this year, when Brian Sack's team will have to purchase about $216 billion to replace matured TSYs. According to JPM calculations, this represents half the net new government debt that will be issued over the next 12 months.
We were fully expecting not only a tail, but a whopping tail in today's weak market. And that is precisely what we got when moments after we learned that the When Issued was trading at 1.774% before the 1pm announcement, the 5 Year printed at 1.78%, a tail of 1.1 bps, a mirror image of yesterday's squeeze into the auction!