Yesterday, when looking at the suddenly tumble in the repo rate of the 10 Year, which we noticed that it had drifted sharply into “super duper” special territory, and which according to SMRA was bid at -1.75% while CA saw it as low as -2.75%, we asked: is a major Treasury squeeze on deck.”
We don’t know the answer just yet: so far, we have yet to see a sharp move higher in the price of either the cash or synthetic 10Ys, however what we do know is that as of this morning, whether it is due to shorting or not (and as Credit Agricole’s David Keeble did note yesterday the “specialness may be related to an accumulation of shorts and playing against swap spreads”), there has never been a greater shortage of 10Y paper at least as demonstrated by what just happened in the repo market where the 10Y,according to ICAP unit GovPX, hit a whopping -2.90%, or just shy of the fail rate!
The following chart from Stone McCarthy, which has the 10Y at “only” -2.6%, shows the shortage of 10-Y collateral as the highest since June 12, 2014. If one uses the -2.9% lowest bid, however, it means that there has never been as acute a shortage of 10-Year paper as there is right now.
According to SMRA this is a temporary phenomenon: “pressure will likely ease up following its auction announcement this morning.”
However, on several previous occasions, that was not the case, and what ended up happening every single time was a sharp squeeze sending 10-Y prices surging.
In any event, we will find out tomorrow when we get the updated repo rate; if it persists at “near fail” levels, it will confirm that there is indeed something strange going on with the short side of the 10Y and explain the substantial selling pressure in past few days, as well as the jump in yields which has been dubbed as one of the main reasons unleashing the ongoing risk-on rally across all asset classes.
Finally, if this is nothing, but another massive short squeeze, should it fail to push the 10Y yield through 2% or higher, the reversal will be swift and quite brutal. Keep an eye on this chart.
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