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.
“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 comes as Treasury yields surged, with the 10-year at one point Thursday touching 5.28%, the highest since 2002.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing