Failure to deliver for all 10-year notes rose in the week endedMarch 2 to US$32.3 billion, from $132 million the week before, thelatest data from the Federal Reserve Bank of New York show. Thefigure is the highest since June 2013, when Treasuries tumbledafter then-Fed Chairman Ben S. Bernanke signaled the central bankmight slow its bond buying, an episode dubbed the “tapertantrum.”

There is a history of rising demand for specificmaturities in the repurchase-agreement (repo) market in thedays just before auctions as traders sell—or go short. Yet thistime, the phenomenon was apparent well before the governmentissued 10-year notes on March 9. So many traders were amassingshort bets on the on-the-run note maturing in February 2026 thatits repo rate was pinned near negative 3 percent for much of theweek, leaving it “on special” in trader parlance. A rush of corporate-debt issuance was partly to blame,according to Peter Tchir at Brean Capital LLC.

“There was this weird anomaly of less 10-year Treasury notesupply at the same time there was very strong demand forhedging-related sales, particularly versus corporate bonds,” saidTchir, head of macro strategy in New York. “This situation willstay for a little while.”

Investment-grade company debt issuance has tallied $302 billionthis year, the second strongest start to a year on record,according to data compiled by Bloomberg. Investors who buycorporate bonds often simultaneously sell similar-maturityTreasuries to focus their wager more on credit conditions than oninterest-rate movements.

Trades involving the benchmark 10-year note were goinguncompleted, or failing, as the cost to obtain the debt in repomatched the 3 percent penalty that's imposed on unsettled trades. Anegative rate indicates traders are willing to pay to lend cash toget their hands on the issue.

The increased demand in repos may also stem from traders tryingto borrow the security as part of betting against it after a rallyin Treasuries pushed 10-year yields last month to the lowest since2012.

Short Crowd

A category of investors known as leveraged funds, whichtypically use borrowed money to boost returns, held net shortwagers in 10-year Treasury futures of about 174,000 contracts as ofMarch 8, compared with about 264,000 the prior week, CommodityFutures Trading Commission data show.

To curb fails amid demand for U.S. government debt during thefinancial crisis, the Treasury Market Practices Group, anadvisory committee, imposed a 3 percent penalty for uncompletedtrades in 2009. Since then, repo rates have occasionally droppedbelow zero. Securities that can be borrowed at rates close to theFed's target—at 0.36 percent in trading Friday—are called generalcollateral, and rates well below that are deemed “on special.”

The imbalance of supply and demand for the newest 10-year notein the repo market may ease after the $20 billion of notes theTreasury sold March 9 settle on March 15.

Total settlement delivery failures for all Treasuries, excludinginflation-protected securities, were $127 billion for the weekended March 2, up from $70 billion seven days earlier, Fed datashow. Fails set a record $2.7 trillion in 2008.

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