Over the past several days, in addition to the ongoing bear market rally in the S&P500, another dramatic move has been the impressive slide in Treasury prices, manifesting itself in the following spike in 10Y yields:
This move has prompted rates traders to wonder if the selling was organic, if somewhat panicked, unwinding of long positions or just an influx in new shorts, whether due to macro considerations or as rate-locks as a slew of new Investment Grade issuance comes to market.
Courtesy of Stone McCarthy and Credit Agricole, both of whom point out our favorite repo market “stress” indicator, the “specialness” level of the 10Y, we now have the answer: as of this morning, there has been an unprecedented spike in new shorts manifesting itself in a plunge in the repo rate on the 10Y alone even as all other points on the curve remain largely unchanged.
This is what Stone McCarthy said:
The 10-year issue tightened severely yesterday and is at -175 basis points this morning. This is the tightest that we have seen the 10-year note since December 14th, 2015. We expect the 10-year note to remain quite special even after its auction announcement tomorrow.
Indeed, one reason for the spike in shorting could be ahead of the upcoming 3, 10 and 30 Year auction, however, those usually take places just prior, and rarely do they stretch back as much as has been the case this time.
Credit Agricole strategist David Keeble admits as much saying that while it’s typical for the current 10Y to trade special in repo leading up to next auction and settlement, the “super duper” specialness may be related to an accumulation of shorts and playing against swap spreads.
According to Keeble who is cited by Bloomberg, today the 10Y is even more special in repo than SMRA’s -1.75%, and is bid around -2.75% in repo, “more special than usual” before next auction.
He adds that the 10Y swap spreads are bumping up against -18bp level so there’s “a lot of people playing 10Y shorts against swaps” adding that 10Y spreads are down -0.91bp to -17.68bps, touched recently touched a record low -17.88bps.
Another dealer, this time TD securities, adds that the extreme short in current 10Y highlights lack of issue available and the legitimate need for it. It highlights that at the Fed’s Securities Lending Operation yday, dealers wanted $3.173b of current 10Y, received $1.625b, or everything available.
Perhaps all that is happening is that the near record spec shorts in 10Y equivs which have been dominant, and suffering major losses throughout 2015, and which unwound their net short position in the past week as shown below…
… are merely reopening recently closed short bets.
However, we fail to see what has changed in the macro landscape to usher in a substantial change in the macro landscape, and we futher believe that once the current tactical move is over, the drift lower in global yields driven primarily by failed central bank policies and negative interest rates, will once again reestablish itself.
via Zero Hedge http://ift.tt/1RGSape Tyler Durden