U.S. 10-Year Note Shortage Eases as Treasury Seeks Holding Data

U.S. Treasury 10-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.

The Treasury Department asked today for information about positions in 2 percent notes maturing in February 2023, with a threshold of $2 billion as of the close of business on March 11. The on-the-run, or most actively traded 10-year note, came into short supply in the repurchase agreement market that investors pay interest on cash lent to borrow the debt, resulting in a negative repurchase agreement rate. The Treasury sold an additional $21 billion of the notes on March 13.

The repurchase agreement, or repo, rate on the benchmark 10-year note closed with the lowest repo rate for all specific securities, at negative 2.95 percent on March 13, according to data from ICAP Plc, the world’s largest inter-dealer broker. The repo rate for the note opened yesterday at negative 2.8 percent and closed today at 0.02 percent. The overnight general collateral Treasury repurchase rate opened today at 0.25 percent.

The Treasury in February 2012 asked for similar positioning data related to transactions in the then seven-year note, the 1.25 percent notes of January 2019, which had also come into short supply in the repo market prior to a new auction of that maturity debt.

Below Zero

Repo rates 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.

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 repo rate.

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 Fed 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 0.75 percent Treasury notes maturing on Sept. 15, 2013.