(Bloomberg) — US funding markets could face disruptions from traders seeking to profit from a continued march higher in Treasury yields.
A common way of betting on yields to rise is to create a short position by borrowing a Treasury security in return of an overnight loan of cash to its owner. As demand to borrow a specific note or bond increases, the interest rate on the overnight loan will tend to decline, becoming — in market parlance — “special.”
That’s already evident in the market for repurchase agreements, where the rate to borrow the current 10-year Treasury note traded as low as 2.70% before closing at 3.75%, according to Curvature Securities.
By comparison, the rate for non-specific, or so-called general collateral Treasuries, traded at 3.86% before closing at 3.92%. That’s a sign that traders are willing to pay up to borrow certain Treasury notes compared to other collateral in the repo market.
What’s unusual about a “special” rate for the current 10-year note is that the security is slated for a second reopening next week. Supply is already ample near $92 billion, including about $10.6 billion in the Federal Reserve’s holdings of Treasury securities. Treasury said Thursday it plans to sell $39 billion of 10-year issues on Oct. 7.
“There’s a deep short base in the market and no surprise there are a lot of shorts in the 10-year,” said Scott Skyrm, executive vice president at Curvature Securities. “The WI announcement and the auction will bring more shorts into the issue. I expect the 10-year will continue to be volatile for the next two weeks.”
The onset of volatility for the issue comes as Treasury yields surged, with the 10-year at one point Thursday touching 5.28%, the highest since 2002, before easing. The advance has come as the Fed is bent on cooling inflation that’s run well past target for years against a backdrop of $100-a-barrel oil, the AI spending boom and a record US $40 trillion debt load.
Last month traders paid a premium to borrow two- and five-year Treasuries, but while that pressure has dissipated with the month-end settlement period on Sept. 30, there’s demand for older issues, known as off-the-runs, according to Skyrm. For example, the five-year sold in August traded as low as 0.75% after dropping to minus 1% on Wednesday.
FED OPERATIONS AND PUBLISHED RATES
TREASURY CASH BALANCE AND BILLS
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