Failure to deliver for all 10-year notes rose in the week ended March 2 to US$32.3 billion, from $132 million the week before, the latest data from the Federal Reserve Bank of New York show. The figure is the highest since June 2013, when Treasuries tumbled after then-Fed Chairman Ben S. Bernanke signaled the central bank might slow its bond buying, an episode dubbed the “taper tantrum.”

There is a history of rising demand for specific maturities in the repurchase-agreement (repo) market in the days just before auctions as traders sell—or go short. Yet this time, the phenomenon was apparent well before the government issued 10-year notes on March 9. So many traders were amassing short bets on the on-the-run note maturing in February 2026 that its repo rate was pinned near negative 3 percent for much of the week, 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 note supply at the same time there was very strong demand for hedging-related sales, particularly versus corporate bonds,” said Tchir, head of macro strategy in New York. “This situation will stay for a little while.”

Investment-grade company debt issuance has tallied $302 billion this year, the second strongest start to a year on record, according to data compiled by Bloomberg. Investors who buy corporate bonds often simultaneously sell similar-maturity Treasuries to focus their wager more on credit conditions than on interest-rate movements.

Trades involving the benchmark 10-year note were going uncompleted, or failing, as the cost to obtain the debt in repo matched the 3 percent penalty that's imposed on unsettled trades. A negative rate indicates traders are willing to pay to lend cash to get their hands on the issue.

The increased demand in repos may also stem from traders trying to borrow the security as part of betting against it after a rally in Treasuries pushed 10-year yields last month to the lowest since 2012.

Short Crowd

A category of investors known as leveraged funds, which typically use borrowed money to boost returns, held net short wagers in 10-year Treasury futures of about 174,000 contracts as of March 8, compared with about 264,000 the prior week, Commodity Futures Trading Commission data show.

To curb fails amid demand for U.S. government debt during the financial crisis, the Treasury Market Practices Group, an advisory committee, imposed a 3 percent penalty for uncompleted trades in 2009. Since then, repo rates have occasionally dropped below zero. Securities that can be borrowed at rates close to the Fed's target—at 0.36 percent in trading Friday—are called general collateral, and rates well below that are deemed “on special.”

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

Total settlement delivery failures for all Treasuries, excluding inflation-protected securities, were $127 billion for the week ended March 2, up from $70 billion seven days earlier, Fed data show. Fails set a record $2.7 trillion in 2008.

Instant Insights /

Trouble in Treasuries Market

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