Yesterday morning we noted a very disturbing trend: over the past three days, a shortage of 10 Year treasury paper has manifested that has grown more and more acute with every passing day, until the repo rate hit as low as -2.95% yesterday morning just shy of the "fails" -3.00% minimum rate, the lowest on record, and suggesting that the marketwide treasury shortage has never been worse as a result of a huge short overlay.
As we also noted yesterday, some such as Stone McCarthy were hopeful that the shortage would cease following yesterday's auction schedule announcement by the Treasury. We were more skeptical:
According to SMRA this is a temporary phenomenon: "pressure will likely ease up following its auction announcement this morning."
However, on several previous occasions, that was not the case, and what ended up happening every single time was a sharp squeeze sending 10-Y prices surging.
We were right: a quick update on today's repo shows the following, again from Stone McCarthy:
The 10-year note has hit the fails charge. The fails charge is either 0.00%, or the low end of the fed funds rate minus 300 basis points, so currently it is at -275 basis points, exactly where the 10-year note.
The record low repo rate is shown below:
In other words, the repo rate can't go any lower, and as of this morning any demands to cover Treasury shorts are met with "Delivery Failure" notices. For those who are unfamiliar, a "Delivery Failure"occurs when one party fails to deliver a U.S. Treasury security, Agency Debt or Agency MBS to another party by the date previously agreed by the parties (Sifma has more).
It also means that there is an unprecedented (and based on the historical data, record) amount of shorts who would rather pay the fails charge than to cover their positions on the delivery demand, or alternatively, there is simply not enough Treasurys in the private market that are not locked up in short positions.
Finally, this means that the panicked scramble by various entities, including central banks, to short US Treasurys continues unabated.
What is strange, however is that even with this unprecedented shorting onslaught, the rising 10Y yield - which is also pushing up stocks at this very moment - can barely rise to 1.88%. The reason for this is structural: no matter how much higher the Fed and other participants try to push US paper, foreign buyers starving for yield in a NIRP world will sooner or later unleash their own buying spree and in the process send yields crashing, and furthermore since it will also include a scramble by shorts to cover, we expect that the next lew higher in 10Y will take out all time low yields in the U.S.