Are Repos Signaling A Massive Bond Short Ahead Of Payrolls?

It's been a few months 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 on Friday, to a special -2.00% on Tuesday, and then a Super Special, near-record, "fails rate" of -3.45% this morning.

Commenting on this dramatic move in 10Y repo rates, Stone McCarthy's Alan Chernoff, notes that "The 10-year note continues its descent through the fails charge and is at -3.45% at the time of this writing. Issues often tighten prior to their auctions due to increased demand from traders hedging prior to the auction and decreased supply from dealers liquidating since they have to be involved in the auction. We don't expect it to rise above the fails rate for the next few days, possibly not even until the new auction settles."

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 repo fails amount has surged...

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."

Finally, Chernoff notes that "The 3-year note remains tight this morning at 0.65%, and the 30-year is at 0.60%. Both issues will have the details of next week's auctions announced later this morning. Most of the rest of overnight repo is trading near GC."

So is this super-special repo a signal that - despite a rise in net spec futures exposure - that traders are positioning a big bond short ahead of tomorrow's payrolls print?


spastic_colon Thu, 12/07/2017 - 09:05 Permalink

SSDD i truly think they are working furiously on all revision econ to ensure the perfectly worded and calculated jobs number in anticipation of the fed meeting in order to ensure the perfect market reaction; in a rigged system the busiest people are the bean counters and programmers.

wonger Thu, 12/07/2017 - 09:13 Permalink

Correct and NFP will be whatever they feel is needed to justify the market move they require, im going for NFP miss bigtime, gold euro rally 

Harry Lightning Thu, 12/07/2017 - 09:26 Permalink

The negative repo rate indicates there is a shortage of ten year notes in the market for traders to borrow. That would happen when a big player or players is hoarding the security. There has been a huge flattening trade being built in the US Treasury market for quite some time now, and whoever has been accummulating the long end paper side of the trade either is not allowed to lend its holdings or refuses to do so.That is the most reasonable explanation for the tightness in the repo market. The Fed could end the problem very easily by announcing that it is adjusting its reverse QE program by making a one time special sale of a few billion ten year notes. If the repo rate still does not loosen, the Fed should sell even more from its inventory. Eventually there will be more notes circulating in the dealer market than there is a flattening trade buyer for them, and the repo rate will come back to normal.

Harry Lightning buzzsaw99 Thu, 12/07/2017 - 10:11 Permalink

Perhaps so but if the primary dealers start whining loud enough to the Fed Open Market Operation desk at Fed New York, that desk could inject a significant supply of tens into the market without the Board of Governors or Yellen having anything to say about it. The trading des at Fed New York has that authority as part of its mandate to maintain liquid markets for US Treasuries. In the past whenever this ind of squeeze has occurred, all it took was a phone call fro the Fed New York Presdient to the head of the firm doing the squeezing, and the situation resolved quickly. No trading firm wants to be on the wrong side of the Fed, they will bleed you to death with audits and investigations, and make it very difficult for you when the time comes that your firm needs liquidity and no one in the market will lend to you. Look at Lehman. The unwillingness of the Fed to help that firm with its liquidity problem in 2008 allegedly stemmed from Lehman's unwillingness to join the Fed's bailout of Long Term Capital iin 1998. These people have long memories.

In reply to by buzzsaw99

DrDinkus Thu, 12/07/2017 - 12:37 Permalink

Whoever writes these repo articles needs to do their homework. the fails rate is 300 bps thru the Fed discount 10's are actually trading 175 bps THROUGH the fail rate....crikey

Madolf Sanders… Mon, 12/11/2017 - 22:03 Permalink

So is this super-special repo a signal that - despite a rise in net spec futures exposure - that traders are positioning a big bond short ahead of tomorrow's payrolls print? Ans: No