Bloomberg News

U.S. Five-Year Special Repo Status May Dissipate After Auction

September 26, 2011

Sept. 26 (Bloomberg) -- Treasury five-year notes will be in less demand in the short-term market for borrowing and lending the securities after the government sells $35 billion of the debt this week, according to traders.

They have been willing to pay to borrow the securities in exchange for loaning cash for the most actively traded five-year notes, the 1 percent securities maturing in August 2016.

The current five-year note opened at the lowest repo rate of negative 0.20 percent and was at the lowest repo rate of negative 0.97 percent at 10 a.m. New York time, according to figures from ICAP Plc, the world’s largest inter-dealer broker. The overnight general collateral rate opened today at 0.20 percent and traded at 0.22 percent at 10 a.m.

“The Street will typically set up large shorts to position for upcoming supply,” said Kenneth Silliman, head of short-term rates trading in New York at Toronto Dominion Bank’s TD Securities unit. “That typically will work its way out once the new issue settles.” A short is a bet a security may lose value.

Dealers use repos to finance holdings and increase leverage. Securities that can be borrowed at interest rates close to the Federal Reserve’s target rate of zero to 0.25 percent are called general collateral. Those in highest demand have lower rates and are called “special.”

Five-Year Auction

The Treasury will auction five-year notes on Sept. 28 after selling $35 billion of two-year securities tomorrow. It will offer $29 billion of seven-year debt Sept. 29.

The yield on the existing five-year note increased three basis points, or 0.03 percentage point, to 0.91 percent, according to Bloomberg Bond Trader prices. The 1 percent security maturing in August 2016 dropped 5/32, or $1.56 per $1,000 face amount, to 100 14/32.

“The specialness of the current five-year note should dissipate after we get new supply later this week,” said Brian Smedley, a strategist in New York at Bank of America Merrill Lynch. “It will turn out to be a short-term phenomenon ahead of the auction.”

The central bank owns about $1.07 billion of the 1 percent coupon Treasury note that matures in August 2016 in its System Open Market Account, or SOMA, as of Sept. 21, according to data on the New York Fed’s website. That is equivalent to 2.97 percent of the total outstanding.

The Fed offers specific Treasury securities held in SOMA for loans to dealers against general collateral on an overnight basis. Dealers bid in a multiple-price auction held every day at noon New York time.

--Editors: Dennis Fitzgerald, Paul Cox

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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