"We've Never Seen Anything Like This": Repo Market Snaps As 10Y Suffers "Epic Fail"

It's been a while since we saw any major dislocations in the Treasury repo market, i.e., collateral shortages as a result of surging TSY shorts, for the simple reason that after the first quarter when everyone was certain that Trump reflation trade would kick in but didn't, the record number of built up spec net shorts got trampled by the rising price, rapidly shifting over to record longs.

However, the peace and quiet quiet in the repo market was shattered this week, when almost overnight the 10Y went from "normal" in repo, at a rate of 0.50% on Friday, to a special -2.00% on Monday, and then a Super Special, if not record, "fails rate" of -3.50% this morning.

Commenting on this dramatic move in 10Y repo rates, Stone McCarthy's Alan Chernoff, in a note titled "Epic Fail", writes that "the 10-year note has been below the fails rate and shows no signs of moving! It opened at -350 basis points, and though pressure has eased off of it slightly, it is STILL below the fails rate at -300 basis points."

As a reminder, the fails rate is the 300 basis points below the lower end of the target fed funds rate, putting it at -200 basis points currently. And, if an issue falls below the fails rate, it becomes cheaper to just pay the fails charge of 200 basis points rather than deliver than issue, which is what is happening. In dollar terms, the agency repo fails nominal was at $131BN on  Sept. 6 vs $153.6 BN on Sept. 5, above the 5-DMA $90.7b, according to DTCC data.

To be sure, some firms that want to maintain good client relationships will likely want to deliver the trade at such a low rate, although it appears that not many are rushing to do so.

As Bloomberg writes, confirming what we have said repeatedly in the past 3 years when we commented on these sudden repo market dislocations, the "specialness is due to lack of supply as shorts roll from triple-issued old 10Y into single issue current 10Y."

No matter the reason, Chernoff observes that he has never seen a move quite like this and that "this is one of the lowest rates that we've ever seen the 10-year note repo trade at, and definitely the furthest below the fails rate."

One final observations: while even term 10-year repos are below the fails charge at -215 basis points, the 3-year note is only modestly tight at 65 basis points, while and most other issues are trading near GC.

Some final parting words: keep a close eye on the 10Y - a positioning move of this magnitude does not take place in a vacuum, and either "someone knows something" or another busload of specs is about to be crushed once more.


Haus-Targaryen Newsboy Thu, 09/07/2017 - 11:00 Permalink

Articles like this is why I keep coming back to ZH day after day after day.  Just about the time I get a certain arrogance about me, and "I know it all" along comes this, which might as well be Greek, and I am humbled. Thanks Tylers for teaching me a thing or two and keeping my ego in check.  Its greatly appreciated. 

In reply to by Newsboy

knukles NoDebt Thu, 09/07/2017 - 12:47 Permalink

Years ago one of our operations was required to post UST bills on governmental deposits.  Wasn't at all uncommon in them thar old days.  And very late, minutes before the Fed wire closes, the custody area calls in a panic and needs some specific bills.  So I search around with the proviso of Must Make Delivery, and only Salomon made an offer.  Which I took.  I call the cage tell them and send the ticket right over.Shortly thereafter, the cage calls.  Where're the fucking bills you bought?  The Fed wire ain't gonna git kept open all day, Bozo. So I call Solly.  No gots, no deliver.  I said I toldja I needed the paper toot sweet.  Tough.  Not sorry, Tough!So I bought Salomon in at a premium.That's right.  I bought Salomon in, paying a premium for Treasury Bills.  BTW, buying them in means that I have the paper and they owe the other guy the difference."I don't get no respect"

In reply to by NoDebt

buzzsaw99 Thu, 09/07/2017 - 10:57 Permalink

janet has three bags full so don't get too excited.  long term, this changes nothing.  the 10Y is heading for sub 1% yield whether you believe it or not.

Pool Shark buzzsaw99 Thu, 09/07/2017 - 11:34 Permalink

Frankly, it's nearly impossible to pick the "Bubble Du Jour," but history has proven time and time again that in times of crisis, cash, bonds and gold do very well.Additionally, there is currently so much debt in the system, it will soon be difficult/impossible for Joe 6-Pack to service his debt. At a minimum, debt creation is destined to slow down, which brings the Ponzi to a screeching halt.When debt creation slows, there will be a "Hunt for Liquidity" to service debt: assets have to be dumped to raise cash.Buy things that are in short supply. Right now, CASH is in short supply; 40% of the population can't even come up with $400 for an emergency. When the next recession hits (I know, we never left recession...) there will be an asset fire-sale (even bigger than 2009), and those with no debt who are holding cash, will be like kids in a candy store... 

In reply to by buzzsaw99

Withdrawn Sanction Pool Shark Thu, 09/07/2017 - 12:20 Permalink

"Gold LOVES deflation and recessions..."It should, so long as it's money, and for a lot of people it is. Money becomes more valuable in a deflation for the same reason that it becomes less valuable in an inflation.   It's value is always measured relative to the values of what it can buy.  Typically in deflation, it is time value assets (stocks, bonds, real estate, etc.) that lose value relative to money (financial asset prices are deflating).  They lose value because, on balance, they are being sold thereby driving down their prices.  And once sold, what do the sellers receive?  Money. So money need not absolutely appreciate for it to gain value.  Only the things that money buys need to lose value faster than money does for money to gain on a relative basis.  The irony of all this is the Fed's negative real rate policy is aggravating the very deflation they say they want to avoid.  

In reply to by Pool Shark

Not My Real Name Pool Shark Thu, 09/07/2017 - 17:56 Permalink

"Anyone who thinks that gold is an INFLATION hedge needs to explain why gold went from $850 to $200 between 1980 and 2000 with inflation raging the entire time."What are you talking about? Inflation was raging in the 70s. Remember WIN (Whip Inflation Now)? Volcker being forced to raise interest rates into high teens started in the late 70s as a last ditch response to break the back of inflation? FFS, the inflation that occurred between 80 and 2000 was child's play ...Oh ... and while all of that inflation was raging in the 1970s, gold rose from $35 to $800.The bottom line is gold loves deflation AND inflation.

In reply to by Pool Shark

Clowns on Acid buzzsaw99 Thu, 09/07/2017 - 12:09 Permalink

Not if they lift the debt ceiling but also have the Fed reverse QE (over a 3 year period...yada yada) . From Goldman to JPM...they all know that they have to "normalize" the yield curve or disaster (global)  is not very far away.How to normalize? See above. Now if you are talking about "real" interest rates ....its a different story.

In reply to by buzzsaw99

wisehiney Thu, 09/07/2017 - 11:00 Permalink

I need to raise some funds to buy precious.If you will just bid 130 for this TLT I am holding here.I will relieve you of your suffering.And take my dump truck down to the precious metals shop.

DrDinkus Thu, 09/07/2017 - 11:05 Permalink

the fail rate is actually -200, as it is 300 bps thru the discount rate...got as hot as -3.50 today, so 450 thru the disco rate...madness. more pain ahead.

hooligan2009 Thu, 09/07/2017 - 11:12 Permalink

some dots to connectus debt clock hqs not hit 20 trillion, in fact has been stuck at 19.8 trillion for monthsus fiscal deficit is around 75 billon per monththe us will raise its debt ceiling on a time dependent basis, rather than an amount dependent basis... http://www.usdebtclock.org/my thinking - the us government needs to borrow aorund 400 billion in the next two months - probably in the ten yeardot dot dot

Clowns on Acid Argos Thu, 09/07/2017 - 11:28 Permalink

It ain't gobbly gook. Go to google and learn how repo is used. Here is a hand out...Repos are the same as borrowing shres when one ios short an equity. Remember that when one sells somehting they don't own...(going short) they have to "borrow" that bond from someone who owns the bond, in order to bve able to deliver the bond that they sold to the buyer (Clearing House handles this).The short seller borrows the bond in the repo market for what ever period they choose (typically overnight to 1 week) and they pay / receive the "repo rate".The article describes a situation where the market is sooo short the 10 yr bond (on spec) that the repo rates are at historic lows (actually highs given the fact that they are paying pts for repo rather than receiving pts).Thus the author says that either someone knows something ...(thats why the specs are sooo short), or that they are about to get crush_ola'd. Kabeesh?

In reply to by Argos