A Sudden Rumbling In The Repo-sphere Sends 10 Year Treasury Shorts Scrambling

Curious why Treasury yields have ground lower this morning, considerably more than would perhaps be expected given the consumer sentiment data, and in the process have prevented the intraday "rotation" out of bonds into stocks, pushing the DJIA higher for the 11th consecutive day? The answer comes from the Fed which tipped its hand earlier and scared a few big bond shorts by issuing a Large Positions Reports from those entities which own more than $2 billion of the 2% of February 2023 (CUSIP: 912828UN8 auctioned off in February and reopened on Wednesday).

In an unexpected request, and on the back of a surge in fails to deliver earlier in the week and the huge apparent buyside demand in the latest 10Y auction (Primary Dealers getting only 22.3% of the takedown in the UN8 vs typical 40-60%) which settles today, MNI reports that the Fed is now inquiring who has large chunks of the bond: something it has not done since February 2012.

From MarketNews:

The Treasury is calling for Large Position Reports from those entities whose reportable positions in the 2% Treasury Notes of February 2023 equaled or exceeded $2 billion as of close of business Monday, March 11, 2013. Entities with reportable positions in this note equal to or exceeding the $2 billion threshold must report these positions to the Federal Reserve Bank of New York. Entities with positions in this note below $2 billion are not required to file Large Position Reports.


Reports must be received by the Government Securities Dealer Statistics Unit of the Federal Reserve Bank of New York before noon Eastern Time on Thursday, March 21, 2013, and must include the required position and administrative information. Large Position Reports may be faxed to (212) 720-5030 or delivered to the Bank at 33 Liberty Street, 4th floor.


Details on Call for Large Position Reports


Security Description: 2% Treasury Notes of February 2023, Series B-2023
CUSIP Number: 912828 UN 8
CUSIP Number of STRIPS Principal Component: 912820 B3 0
Maturity Date: February 15, 2023
Date for Which Information Must Be Reported: March 11, 2013 as of COB
Large Position Reporting Threshold: $2 Billion (Par Value)


Date Report Is Due: March 21, 2013, before noon Eastern Time

More evidence of a sudden shortage of safe paper was today's $5.199 billion POMO in the 2017-2018 space, which was covered at a record low 2.54 times (with the previous record QE3-low of 2.67 occurring on February 13 in the 2036-2042 space), showing Primary Dealers are suddenly very leery of handing over their bonds to the Fed.

Adding further mystery to what appears a sudden 10 Year collateral shortage, is that repo rates in the Tuesday-Thursday period have averaged between -2.543% and -2.838%, which have been abnormally low even accounting for the Wednesday UN8 reopening.  While "it is not uncommon for the new issue to trade super rich in repo ahead of settlement," specialness has not exceeded -1.00% for current 10Y notes recently, Barclays strategist Joseph Abate said.

As Bloomberg adds, repo specialness is effectively capped at -3.00%, equal to the 3% penalty that since 2009 has been assessed on cash lenders that fail to deliver borrowed securities. Feb-23 10Y, reopened for $13b, did trade at rates below 3.00% this week, presumably “because some desks did not want to be seen failing" though it would have been cheaper to do so, TD strategist Richard Gilhooly said.

So while most (interested) people know that in a world in which real assets and collateral are becoming increasingly scarce, and only the tenuous connection between the unfunded shadow banking system and deposit-fed traditional liabilities is allowing the perception of a status quo to persist by keeping asset prices rising, what many may not know is that without the creation of real assets but merely through the injection of some $85 billion in claim-dilution courtesy of the Fed every month (and as a matched $85 billion in safe assets is pulled away by the same Fed), the market may be reaching its saturation point on how much securities the Fed may be buying.

If the ongoing repo super-specialness persists, beware: as it will be the first time since Lehman that cracks have appeared in the very fragile shadow banking system. And shadow banking is perhaps the one key aspect of financial markets that has remained untouched since the great financial crisis, and also happens to be the critical nexus that allows Dealers to transform reserves into risk-asset purchasing dry powder. 

Should systemic weakness suddenly spread through repo, and thus shadow banking, run.