Earlier this week, when looking at the rapidly fraying dynamics in the all-important Treasury repo market, we explained that as a result of the unprecedented, record shortage of underlying paper, the repo rate for the 10Y has plunged to the lowest on record (and even surpassing it on occasion), the -3.00% “fails” rate, an unstable, broken state characterized by a surge in failures to deliver and receive, when one party fails to deliver a U.S. Treasury to another party by the date previously agreed by the parties. Think of it as a margin call issued on a stock in which the responsible party refuses to comply, and is instead slapped with a token penalty, or “fails” fee.
This is precisely what has been going on with the Treasury market for over a week, ever since last Friday when we first pointed out the precarious collapse in the repo rate on the 10Y – traditionally the best indicator of stress in lending markets.
There was some expectation that after this week’s 10Y and 30Y auctions, that the shortage would moderate, however so far that has not happened, and now the last possible renormalization date is when these auctions settle early next week.
For now, however, things are going from bad to worse, and as Stone McCarthy shows in the following two charts, it is no longer just the 10Y which is in trouble: so is the 30Y, which as of this morning is trading near the fails range, or -2.40% in repo.
But more importantly, we no longer have to rely on the repo market to see just how broken the Treasury market has been this past week as a result of what has been an unprecedented shorting onslaught. As of this morning, the NY Fed’s Primary Dealer database was updarted for the most recent failures to deliver and receive data, and it is a doozy when it comes to 10Y paper.
Here are the facts:
