Treasury Shortage Is Back: 2 Year Plunges To -1.74% In Repo
It has been a while since wholesale shorting of Treasurys pushed them so far deep into negative territory that one needed a bigger chart to see just how little underlying collateral is available. This morning, following the most recent scramble to re-short the bond curve, we find that not only does the 5 Year continue to trade with negative repo rates for all of the past week, but that the 2 Year just cratered into super special territory, as the latest collateral shortage has manifested itself in the form of a -1.74% near "fail" rate for the 2 Year.And from FT Alphaville:
Of course, today's shortage may be merely a technical glitch ahead of auctions. As SMRA notes, "drops like this are not uncommon for the 2-year, and often happen before its auction announcement. Issues tend to tighten prior to their auction announcements, and then often tighter further as the auction approaches. Tomorrow the details of next week's 2-year note auction will be announced."
Actually, they are rather uncommon, and as the following chart shows there have been only 4 such sharp "super special" repo episodes in the past year....MORE
Negative rates as global cash burn
As Paul Krugman always likes to recount, strange things happen at the zero bound. Macroeconomics gets weird. Liquidity traps prevail. And a whole slew of paradoxes come into being.
And that’s largely because below the zero bound things get even stranger still.
What you think should happen, doesn’t, and what you think definitely won’t happen, does. Furthermore, negative interest rates don’t just kill off the traditional point of banking, they encourage bad incentives and dubious market practices for all purveyors of capital.
There’s also the fact that negative rates aren’t necessarily all that liquidity enhancing. To the contrary, they may even be liquidity absorbing. Indeed, John Maynard Keynes foresaw the day when central bankers would have to work more on keeping negative rate forces at bay by propping rates up and targeting zero than the other way around.
According to Bateman, Hirai and Marcuzzo, writing in 2010 on Keynes’ influence on modern economics, what happens in a negative-rate world is that money markets become less efficient at getting rid of surpluses, due to long-standing presumptions about future scarcity or other ongoing carry opportunities getting in the way of rational and efficient pricing. And because generally, well, it’s goes against our human instinct to set banknotes on fire.
In that sense, money markets begin to behave more like commodity markets, wherein extended periods of negative carry are not at all unusual, and which manifest whenever investor expectations about future supply shortages or demand surges overshoot in such a way that the industry is over rewarded for holding back emergency buffer stocks.
But why should money markets, which have historically proven so resistant to negative rates, suddenly have become so inefficient?
According to the authors the answer may lie in the way foreign exchange markets have created a hot potato incentive to keep passing the surplus money float over to those markets that are most likely to burn it....MUCH MORE
