(Bloomberg) — The 20-year US bond is again tripping up traders in the repo market, where participants lend and borrow Treasuries.
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Uncompleted trades — or fails — involving the 20-year Treasury exceeded $21 billion in the week ended Dec. 25, data released late Thursday by the Federal Reserve Bank of New York show. While short of the record high of $22.9 billion reached three months earlier, it was the second-highest amount in the history of the tenor, which the US reintroduced in 2020.
The surge in fails is evidence of a shortage in the 20-year bond, which traders borrow to cover short sales and hedge positions in other instruments. It becomes acute at three-month intervals, when the new-issue supply of the 20-year ebbs.
The problem cropped up after the US Treasury Department in 2021 began slashing the relative size of auctions of the tenor in response to tepid demand from investors, which causes the 20-year to trade at yields higher than the riskier 30-year bond.
The latest spike highlights a conundrum facing the Treasury as it formulates financing plans for the February-to-April quarter, a process that begins Jan. 17 with the release of survey questions for primary dealers.
“It’s reasonable to say the fails will continue until Treasury increases 20-year supply through larger auction sizes, which we anticipate could potentially start growing later this year,” said Steven Zeng, an interest-rate strategist at Deutsche Bank AG.
Boosting 20-year auction sizes could alleviate the quarterly shortages, but may also erode progress toward better pricing relative to other maturities. The newest 20-year bond’s yield at around 4.83% is about seven basis points higher than the 30-year bond’s, down from more than 30 basis points in 2022.
In the past three years, there have been only two other cases of weekly fails exceeding $15 billion by any other Treasury tenor — a group that includes two-, three-, five-, seven- and 10-year notes and 30-year bonds. The 20-year has done it four times.
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