Treasuries repo rout fueled by Japan’s rush out of global debt
en-based investors have been liquidating so-called older Treasury positions, according to traders in Asia, who asked not to be identified as they aren’t authorized to speak publicly. After four straight weeks of losses in U.S. sovereign debt last month, the investors are often selling at a loss, albeit one that is offset by profits from the equity market, added one of the traders.
The impact in the repo market comes from how dealers absorbing the Japanese supply in old bonds — those not used in benchmarks — often short current ones to hedge their positions.
The dropoff in liquidity has seen dealers opt for the more-liquid current 10-year Treasury — where borrowing costs hit as low as minus 4% on Wednesday — highlighting a significant short position in the bonds, while the general collateral repo rate closed at 0.03%.
That means the investor lending out cash for the 10-year bonds ends up having to pay, instead of getting compensated.
Never underestimate that heretofore the US Constitution, the legal respect for property rights, the relative safety of bank deposits and the enforced legality of various security modalities, have made the US an attractive and safe depository for the world’s wealth. Americans have benefited immensely from this huge influx of capital and investment. Alas given the current political realities, it may be changing. In New York foreign investment in high end residential and commercial real estate has virtually ended. However they are still buying premiere farmland.