10-Year US Treasury Borrowing Rate on Repo Market Turns Negative, Sign of Stress
NEW YORK (Reuters) – The cost of borrowing 10-year U.S. Treasuries in the overnight, or repo, market turned very negative on Thursday, analysts said, as investors sought to sell banknotes, causing tensions in the market.
Negative rates in the repo market, which is important to the financial system, with billions of dollars in short-term loans traded daily, partly reflect uncertainty about how long the US Federal Reserve will maintain its policy. easy monetary.
“There is more stress in the market right now because the market is very volatile,” said Scott Skyrm, executive vice president of broker-dealer Curvature Securities.
The negative cost of borrowing came as investors sold the notes in a bet that yields on US Treasuries would continue to rise, on expectations of increased issuance to fund the US stimulus package, and on l optimism about the prospects for recovery as the country emerges from the coronavirus pandemic.
This boosted short positions in the benchmark US Treasury note which last fell 1.578%.
The 10-year cost of borrowing rate, which is generally positive, has been negative since Monday and reached as low as -4.25% on Thursday, analysts said. It was last at -0.50% when the federal government stepped in on Thursday to sell 10-year US Treasuries on the market. The last time U.S. 10-year repo rates turned negative before this week was in June 2020 and before that in March of the same year, Skyrm said.
The general guarantee rate, however, remained above zero on Thursday at 0.05%, after falling last week to -0.05 basis point.
The repo market sees Wall Street financial institutions borrow from money market funds and other investors and pledge their treasury bills and other securities they hold as collateral. Lenders in repo markets typically include money market funds, insurance companies, corporations, municipalities, central banks, and commercial banks that have excess liquidity to invest.
Negative repo rates usually occur when a particular collateral becomes in demand – in this case, analysts have referred to the 10-year Treasury – or when supply is tight in the repo market.
To borrow these securities, buyers must tempt potential sellers with cheap cash or a repo rate lower than the general repo rate for collateral.
On the other hand, brokers and deposit-taking institutions borrow cash against long positions in securities to fund their net stocks and balance sheet position.
“There is general pressure on short-term rates, the same themes that have been in place for some time,” said Tom Simons, money market economist at Jefferies.
“The supply is going down – we have every other day bill refunds here in the range of $ 25 billion to $ 30 billion.”
Gennadiy Goldberg, senior rate strategist at TD Securities, said brokerage positions in non-race or older securities rose sharply with the sale of treasury bills pushing yields higher. Brokers have attempted to hedge this risk by selling securities on the fly or newer securities.
“This has drastically lowered the cost of borrowing treasury bills on the fly and beyond the failure rate which is the penalty rate that market participants pay if they cannot provide a security,” he added.
This so-called failure rate is -3%, Goldberg said.
Some investors also looked to the Fed for collateral on Thursday, with its reverse repurchase transaction registering a demand of $ 2.1 billion, up from half a billion on Wednesday. Demand in the facility rose last week as Treasury volatility increased, peaking at $ 11.2 billion on Friday.
Skyrm said the Fed on Thursday loaned $ 8.7 billion on its $ 10.9 billion of 10-year U.S. notes, easing the debt crunch.
Analysts also said that dealers are also preparing for next week’s US Treasury auction with the sale of $ 38 billion of US 10-year notes reopened, particularly following the poor auction. tickets at 7 from last week.
Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Karen Brettell; Editing by Megan Davies, Kirsten Donovan and Daniel Wallis