NEW YORK (Reuters) – The cost of borrowing from a 10-year U.S. Treasury in overnight repurchase, or market repo, fell sharply on Thursday, analysts said, while investors were trying to shorten the notes, causing market pressure.
Negative rates in the repo market, which is important for the financial system, with trillions of dollars in short-term loans traded on a daily basis, partly reflect uncertainty about how long a Reserve will last. US Federal easy money policy.
“There is more pressure on the market right now because the market is very volatile,” said Scott Skyrm, executive vice president at Curvature Securities.
The negative cost of borrowing came as investors shortened the pounds in a bet that U.S. Treasury yields would continue to rise, with more spreads expected to fund the U.S. stimulus package and hopes of a renewed optimism. animation as the country emerged from the coronavirus pandemic.
That has boosted short positions on the U.S. Treasury benchmark note that last gave 1.578%.
The 10-year cost of borrowing a repo rate, which is generally positive, has been negative since Monday and hit as low as -4.25% on Thursday, analysts said. It was last at -0.50% when the Federal moved in Thursday to sell the 10-year U.S. Treasury in the market. The last time U.S. 10-year repo rates went negative before this week was June 2020 and before that in March of the same year, Skyrm said.
The overall collateral rate, however, remained above zero on Thursday at 0.05%, after dipping negatively last week at -0.05 basis points.
The repo market sees Wall Street financial institutions borrow from money market funds and other investors and pledge the Finance and other securities they hold as collateral. Lenders in repo markets usually include money market money, insurance companies, corporations, urban areas, central banks and commercial banks that have too much money to invest.
Negative repo rates usually occur when demand for a particular collateral security – in this case analysts pointed to the 10-year Treasury – or there is less supply in the repo market.
To borrow these securities, buyers need to attract sellers with cheap cash or a repo rate that is lower than the standard collateral repo rate.
Retailers and investment firms, on the other hand, borrow money against long positions in securities to fund their net investment and equilibrium position.
“There has been a general emphasis on rates at the latest, the same topics that have been around for some time,” said Tom Simons, money market economist at Jefferies.
“Supply is falling – we get repurchased bills every two days here on the order of $ 25- $ 30 billion.”
Gennadiy Goldberg, senior rate strategist at TD Securities, said the positions of sellers in off-run securities, or old securities, have grown significantly with sales in Finance pushing yields higher. Sellers have tried to dig into this risk by selling running or newer securities.
“This has run the cost of Finance run-out borrowing significantly lower and exceeds the failure rate which is the penalty rate that market participants pay if they cannot deliver security,” he said.
The so-called failure rate is -3%, Goldberg said.
Some investors turned to the Fed to find alignment Thursday, with its reverse repo activity seeing demand of $ 2.1 billion, up from half a billion on Wednesday. Demand in the facility increased last week as Treasury volatility plummeted, peaking at $ 11.2 billion on Friday.
Skyrm said the Fed lent $ 8.7 billion of its $ 10.9 billion holdings of U.S. 10-year pounds on Thursday, easing the pressure of debt.
Analysts also said retailers are also preparing for next week’s U.S. Treasury auction with a $ 38 billion sale of reopened 10-year U.S. pounds, especially after a bad 7-pound auction. year last week.
Reporting by Gertrude Chavez-Dreyfuss; Additional commentary by Karen Brettell; Edited by Megan Davies, Kirsten Donovan and Daniel Wallis