Seven-Year Special Repo Clears While Treasury Requests Holdings

U.S. Treasury seven-year notes have become less coveted in the short-term market for borrowing and lending debt as the government tries to find out why the securities were in such short supply last week.

The Treasury Department yesterday asked for information about positions in 1.25 percent notes of January 2019, with a threshold of $2 billion as of the close of business on Feb. 21. That security, the so-called on-the-run or most actively traded seven-year note last week, came into such short supply in the repurchase agreement market that investors paid interest on cash lent to borrow the debt, resulting in a negative repurchase agreement rate. The Treasury sold $29 billion in new seven-year notes on Feb. 23.

The Treasury requested that “entities with reportable positions in this note equal to or exceeding the $2 billion threshold must report these positions to the Federal Reserve Bank of New York” by March 2, according to a press release published yesterday.

The repurchase agreement, or repo, rate on the 1.25 Treasury note maturing in January 2019 fell to below minus 3 percent on Feb. 22. The rate closed at 0.05 percent on Feb. 24, the day after the Treasury sold the new debt.

The rate on the security closed today at 0.03 percent, according to data from ICAP Plc, the world’s largest inter-dealer broker. The overnight general collateral Treasury repurchase rate closed at 0.19 percent.

Below Zero

Repo rates have traded below zero frequently since May 2009 when a 3 percentage point penalty for failing to meet security delivery obligations was put in place. The fee, instituted at the time to reduce failed trades, means that at a repo rate below negative 3 percent it is more economical for a counterparty to fail to deliver than to obtain the needed security in the repo market.

There is no reason to believe that any improper behavior was involved in the dealing in that security last week, said a U.S. Treasury Department official who briefed reporters yesterday on condition of not being identified by name. Nevertheless, the official said, the Treasury is seeking to identify the “large-position holders” of the seven-year notes, hoping to determine that they were continuing to lend into the repo market during that period.

Traders often short, or sell securities they’ve borrowed in the repo market ahead of a Treasury sale of new debt of similar maturity, to profit if prices of the notes fall after the auction. Typically, lenders of cash receive interest on those loans, represented by a positive repurchase agreement, or repo, rate.

Securities Dealers

Securities dealers use repos to finance holdings and increase leverage. Securities that can be borrowed at interest rates close to the Federal Reserve’s target rate, which is in a range of zero to 0.25 percent, are called general collateral. Those in highest demand have lower rates and are called “special.”

Central banks and the Federal Reserve are exempt from these position requests.

The large-position reporting program was established in 1996 to guard against market manipulation. In December 2010, the Treasury announced a test of the program and called for reports from investors holding $2 billion or more of 3/4-percent Treasury notes maturing on Sept. 15, 2013.

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