Spike in Failed Trades Highlights Ongoing 20-Year US Bond Shortage
Recent data shows a significant rise in failed trades for 20-year US bonds, indicating a persistent shortage in the market
US, 20-Year Bond, Treasury, Failed Trades, Market
New York: So, it looks like the 20-year US bond is causing some headaches for traders again. In the repo market, where folks lend and borrow Treasuries, things are getting a bit messy.
Recently, failed trades involving the 20-year Treasury hit over $21 billion in just one week. That’s a huge number, even if it’s not quite a record. It’s the second-highest ever since this bond was brought back in 2020.
This spike in failed trades shows there’s a real shortage of these bonds. Traders often borrow them to cover short sales or hedge their bets on other investments. The shortage tends to get worse every three months when new supply slows down.
The issue started back in 2021 when the US Treasury cut back on how many of these bonds they were auctioning off. They did this because demand from investors was pretty weak, which made the 20-year bond yield higher than the riskier 30-year bond.
Now, this latest jump in failed trades is putting pressure on the Treasury as they plan their financing for the upcoming quarter. They’ll start this process on January 17, asking primary dealers for their input.
One expert from Deutsche Bank thinks the fails will keep happening until the Treasury boosts the supply of 20-year bonds through larger auctions. They might start doing that later this year.
Increasing the auction sizes could help with the shortages, but it might also mess with the pricing compared to other bonds. Right now, the yield on the newest 20-year bond is about 4.83%, which is a bit higher than the 30-year bond.
In the last three years, only two other Treasury types have seen weekly fails over $15 billion, but the 20-year bond has hit that mark four times. It’s definitely a trend to keep an eye on!