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UPDATE 1-U.S. 10-year note sale falls short of expectations
March 9, 2016 / 8:08 PM / 2 years ago

UPDATE 1-U.S. 10-year note sale falls short of expectations

* Treasury trade “fails” spike as repos go “special”

* Indirect purchases at 10-year auction lowest in over a year

* Primary dealer purchase at 10-year sale highest since August (Adds auction details, quotes)

By Richard Leong

NEW YORK, March 9 (Reuters) - A $20 billion auction of U.S. 10-year Treasury notes failed to draw strong investor interest on Wednesday, falling short of expectations and sparking selling in the bond market that sent benchmark yields toward one-month highs.

Prior to the 10-year auction, analysts had expected solid demand for the latest 10-year debt supply because of “specialness” in the repurchase agreement (repo) market and the biggest spike in “fails” of these repos in at least a year this week.

“This afternoon’s 10-year auction did not go very well, despite the need for the issue suggested by the extreme special and rising fails for the 10-year seen in repo trading,” Stone & McCarthy Research Associates market strategist John Canavan wrote in a note.

Repo “specialness” refers to scarcity of 10-year notes for short-term funding. “Fails” refers to failed trades when one party does not deliver a security as scheduled.

Under normal market conditions, Wall Street dealers often borrow overnight cash from money market funds and other investors by pledging their Treasury holdings as collateral.

When a Treasury maturity goes special, investors pay dealers to own the Treasuries, which are quoted at a negative interest rate. This is often seen as a sign of heavy “short” bets on the price of that Treasury maturity to fall or its yield to rise.

“A lot of shorts in the previous 10-year issue are rolling in the latest 10-year issue,” said Scott Skrym, managing director at Wedbush Securities in New York.

Some analysts blamed the 10-year repo specialness on the Treasury Department’s move to pare the size of this reopening by $1 billion this month.

The scramble for Treasuries has became acute this week as interest rate on repos backed by 10-year Treasuries hit the 3 percent penalty rate for “fails” on Treasury trades.

On Wednesday, Treasury “fails” rose on Wednesday for a sixth straight day to $139.2 billion, the highest in at least a year, according to data from the Depository Trust & Clearing Corp.

The ratio of bids to the 10-year note amount offered was 2.49, the lowest since August.

Fund managers, foreign central banks and other indirect bidders purchased 56.53 percent of the latest 10-year note offering, their smallest share since January 2015.

Small bond dealers and other direct bidders bought 11.09 percent, their smallest percentage since October.

Primary dealers, or the top 22 Wall Street firms that do business directly with the Federal Reserve, purchased 32.38 percent, their largest share since August. (Reporting by Richard Leong; Editing by Alan Crosby and Steve Orlofsky)

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