Treasury Fails

November 7th, 2008 11:38 am | by John Jansen |

The Treasury will investigate large positions in an old 2 year note and an old 5 year note. The issues trade at zero in repo and have been failing heavily. Anyone with a position of greater than $2billion will be required to report those positions to the Federal Reserve.

I wonder if this is the beginning of an attemp to clean up the fails in the Treasury market. I do not have a solution but do suggest caution as a solution might have as an unintended consequence a reduction of liquidity in an increasingly illiquid Treasury market.

Several market participants with whom I speak suggest that the problem resides with several large central banks and who have chosen not to lend securities in the repo market. If those entities could be cajoled into lending again it would take quite a bit of pressure off the market.

The Treasury announced their intention to probe these two particular positions but that data is not expected to be reported until next Friday. I think that  will engender some covering in the suspect issues in the interim.

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  1. 11 Responses to “Treasury Fails”

  2. By S on Nov 7, 2008 | Reply

    Why does anyone have to do anything? Perhpas it is not the central banks but the system?

  3. By fatbrick on Nov 7, 2008 | Reply

    What can treasury do to make the central banks to lend again? I am a little curious.

  4. By Fullcarry on Nov 7, 2008 | Reply

    It is hard to expect no fails when GC is trading close to zero.

    Also, the securities the Treasury is asking about are deliverable into the Dec CBOT contracts. So there are massive shorts in those securities.

  5. By John Jansen on Nov 7, 2008 | Reply


    Someone mentioned to me that the Treasury might look to force a situation where repo goes negative.

    What do you think about that?

  6. By Fullcarry on Nov 7, 2008 | Reply

    Oh my…..

    That would kill arbitrage! You would have no idea what it would cost you to borrow a certain security making the cost to you open ended. The CBOT futures contracts could probably die off too. Ultimately it would cause huge illiquidity in the treasury market.

    I still don’t know what the problem is that we are trying to solve. So the securities fail and the short is getting no income on his money.

    That should be enough of a penalty.

  7. By John Jansen on Nov 7, 2008 | Reply

    I agree but one salesman and one trader mentioned that to me.

    I agree that it would create tremendous illiquidity.

  8. By Alex on Nov 7, 2008 | Reply

    Have the fails got anything to do with hedge funds meeting their redemptions?

  9. By tv on Nov 7, 2008 | Reply

    Short fails to deliver

    Someone bot from the short

    The buyer has no position and is out the cash

    Total loss for the buyer in meltdown scenario.

  10. By Fullcarry on Nov 7, 2008 | Reply

    Thanks John! I hope it doesn’t happen.

  11. By kristi on Nov 7, 2008 | Reply

    Would it result in tremendous illiquidity in the treasury market as a whole if we are only talking about specific maturities here?

  12. By t on Nov 7, 2008 | Reply

    Quantitative easing here we come…

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