Bloomberg News

Treasury 7-Year Special Repo Status May Fade After Debt Auction

February 22, 2012

Feb. 22 (Bloomberg) -- Treasury seven-year notes may become less coveted in the short-term market for borrowing and lending securities after the government auctions more of the debt.

Traders have been willing to pay to borrow the securities in exchange for loaning cash for the most actively traded seven- year note, which is the 1.25 percent security that matures in January 2019. Typically, lenders of cash receive interest on those loans, represented by a positive repurchase agreement, or repo, rate. Many times traders short, or sell securities they’ve borrowed in the repo market, ahead a Treasury sale to profit if prices of the securities fall after the auction.

The overnight repo rate for the current seven-year note opened at negative 1.9 percent and traded at negative 2.5 percent at 9 a.m. New York time before closing at negative 2.02 percent, according to data from ICAP Plc, the world’s largest inter-dealer broker. The overnight general collateral Treasury repurchase rate closed at 0.12 percent.

“This tends to happen ahead of the auction,” said Brian Smedley, a strategist in New York at Bank of America Corp. The degree of specialness “is somewhat indicative of a short base in the fast-money community in the seven-year. Oftentimes it just takes getting through the auction process and getting the new collateral to settle” to normalize the repo rate.

On Special

Securities 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, which is in a range of zero to 0.25 percent, are called general collateral. Those in highest demand have lower rates and are called “special.”

The government will sell $29 billion of seven-year notes tomorrow, after auctioning $35 billion in five-year debt today.

The Fed has been purchasing Treasuries due in six- to 30- years since it became extending the average maturity of its debt, in a program that has become known as Operation Twist. The program, where the Fed began replacing $400 billion of short- term debt in its portfolio with longer-term Treasuries in October, is scheduled to end in June.

The Fed has acquired $68.7 billion in Treasuries with maturities between six and eight years as of Feb. 21 through the purchases, or 59 percent of the gross issuance of those securities, according to Fed data tracked by Barclays Plc.

“The seven-year note being on special may be in part due to the fact that there is an upcoming auction of these securities,” said George Goncalves and Stanley Sun, strategist at Nomura Holdings Inc. in New York, in an e-mailed note. “The Fed does own a decent amount of the current seven-year note, since when the Fed buys securities in the intermediate sector as part of its Operation Twist, they have tended to lean toward the seven-year because the 10-year area is so rich.”

--Editors: Dave Liedtka, Paul Cox

To contact the reporter on this story: Liz McCormick in New York at

To contact the editor responsible for this story: Dave Liedtka at

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