Failed Treasuries Trades Seen Spurring U.S. to Step Up Dialogue

  • Treasury seen broaching topic in quarterly auction discussions
  • Debt-market watchdog TPMG planned fails discussion Tuesday

The U.S. Treasury may need to step up its dialogue with primary dealers and investors on ways to combat uncompleted trades of government debt after unsettled transactions surged last month to the highest since 2008, strategists say.

Such deals, known as fails, have subsided after a fresh round of debt auctions in March eased a shortage of benchmark notes. Yet market participants say the Treasury may query dealers and its borrowing-advisory committee on the episode as soon as this quarter as part of efforts to ensure the safety and ease of trading in the $13.3 trillion market for the government’s debt.

At gatherings before quarterly debt offerings, the Treasury delves into topics of importance to its issuance plans and the functioning of the U.S. debt market, whose role as a global borrowing benchmark has helped lower the government’s financing costs. The U.S. may want to address the leap in fails because it has implications for dealers’ ability to buy and sell securities and obtain needed collateral, a key to greasing the wheels of trading, investors say. The Treasury has said it doesn’t consider recent events as pointing to systemic issues.

Bedrock Position

“You don’t want to see this issue become a regular occurrence,” said Amar Reganti, a member of the asset-allocation group at money manager GMO LLC in Boston and a former deputy director of the Treasury’s Office of Debt Management. “The ability to buy, receive or borrow a 10-year note is one of the bedrocks of Treasury-market liquidity. It makes sense for the Treasury Department, as the issuer and the steward of the Treasury market, to consider the secondary-market options that it has to address this issue.”

Discussions in past years have occasionally focused on tools the Treasury might use to alleviate extreme shortages in the repurchase-agreement market that cause fails to soar. The government would have to balance any tweaks to debt-management practices against its goal of making borrowing regular and predictable.

If it’s considering such initiatives, the Treasury would discuss the ideas through the Treasury Borrowing Advisory Committee, known as TBAC, as well as through quarterly questions to the 22 primary dealers, according to Reganti.

Not Extraordinary

Rob Runyan, a Treasury spokesman, said in an e-mailed statement last month that the shortage of benchmark notes around March auctions and the rise in fails wasn’t “too out of the ordinary” or hampering market efficiency.

The shortfall was most evident in on-the-run 10-year notes. In the repurchase-agreement market, where traders borrow and lend government debt, uncompleted trades soared. The cost to obtain the securities in repo rose, and they traded “on special,” meaning there was heightened demand for the specific security.

Cumulative settlement delivery failures for all Treasuries, excluding inflation-protected securities, reached $456 billion for the week ended March 9, the most since 2008, when fails set a record $2.7 trillion, according to Federal Reserve Bank of New York data. Fails sank to $81.6 billion as of March 23.

“It would be appropriate for the Treasury to discuss this now,” said Thomas Simons, a money-market economist in New York at Jefferies LLC, a primary dealer. Treasury may take it up with TBAC “because we are dealing with a recent episode of a particularly difficult period with this issue.”

In trading Wednesday, the benchmark 10-year note was “on special” in the repo market, at negative 0.15 percent at 8 a.m. New York time, according to ICAP Plc data.

Dealer Survey

The TBAC, with representatives from firms such as BNY Mellon, Citadel LLC and Goldman Sachs Group Inc., has offered suggestions in the past on tools the government could use, such as buying back off-the-run securities financed by selling more on-the-runs to possibly setting up a lending facility similar to the Fed’s -- where it would offer debt for a fee.

The Treasury has conducted small-scale debt buybacks since 2014 to test its systems, and has one scheduled on April 8. The U.S. last bought back bonds in more significant amounts in 2002 as part of a program to retire high-coupon debt with money from budget surpluses.

Fail Fix

Fails tumbled from 2008 levels in part after the Treasury Market Practices Group, which is sponsored by the New York Fed, introduced a penalty in 2009 for unsettled trades. The TPMG sets best-practice guidelines for debt markets.

Uncompleted deals have still trended higher since 2012, which some attribute to post-crisis regulations making repo activities less attractive for banks. Shortages have also become more common after quarterly auctions, before reopenings increase the availability of benchmark securities.

The TMPG in a meeting scheduled for Tuesday afternoon in New York was planning to touch on “recent trends in settlement fails,” according to an agenda. The monthly gatherings typically include officials from the New York Fed and the Treasury.

Getting the needed securities to flow into the system to curb failing trades has become more difficult, said Andrew Hollenhorst, a fixed-income strategist in New York at Citigroup Inc., a primary dealer.

“The dealers are less able to do this efficiently,” he said. “But any action the Treasury would take would have to be weighed against costs for them becoming less predictable in how they issue debt.”

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