The cost of borrowing 10-year US Treasuries continues to skyrocket despite record-sized auctions, fueled by a growing pool of investors wishing to bet on higher yields.

After the Treasury market liquidated last week, 10-year and longer-dated yields hit their highest levels in a year, spurring bond market declines, the interest rate on overnight cash loans. the day secured by the last 10-year note – the repurchase agreements or repurchase agreements – fell below minus 3% for just the third time since the start of 2018, according to Scott Skrym of Curvature Securities LLC. This is the threshold below which it is cheaper to pay the regulatory fine for not returning the collateral on time than to renew the loan.

While next week’s auction of additional 10-year notes may ease pressure on repo rates, Treasury yields resumed their rise on Thursday, suggesting bearish bets have room to run. The move began when Federal Reserve Chairman Jerome Powell downplayed the increase in long-term borrowing costs. In unwritten comments on economics and monetary policy, Powell dismissed the idea that the central bank should extend the average maturity of its purchases of Treasury securities, as some Wall Street strategists have suggested.

Next week’s auction “should help, but we have a week left,” John Davies, US interest rate strategist at Standard Chartered Plc, said of the March 10 auction. “The interim period could still be very volatile for Treasuries and the pressure on the repo market may well remain in place.”

Learn more: Why the US repo market has exploded and how to fix it: Quick Take

Liquidity crunch

Last week’s treasury bill crisis was marked by declining liquidity, prompting borrowers to opt for the more liquid current 10-year Treasury – whose repo rate fell to minus 4% on Wednesday – on older tickets in the area that would be cheaper to borrow. The negative interest rate means that the investor selling short term loans the money to borrow the note ends up having to pay, instead of being compensated, and this suggests that there is a significant short position in the security. The general guarantee pension rate, on the other hand, closed at 0.03% on Wednesday.

The daily treasury repo fails – which becomes a cheaper option than hedging a short position when the repo rate falls below 3% – jumped to $ 64 billion on March 3, the highest in four months, according to DTCC . Meanwhile, the 10-year bond’s borrowing rate in the repo market fell to around minus 3.25% on Thursday after trading at minus 3.95%, according to ICAP.

Another illustration of the strong demand to borrow the most recent 10-year note is that the Fed, which owns about $ 14.9 billion of the issue, loaned it in large amounts to dealers. Bank bid size fell from previous sessions on Thursday and dealers were fully stocked, New York Fed The data show. Failures to return to the central bank have also declined, indicating that some short positions are being reduced.

Treasury bills suffered from their the largest monthly loss in four years in February, as 10- and 30-year yields hit their highest level in more than a year, helping an economic recovery as the rate of viral infection in the States -Un is was declining in the middle of the vaccine deployment. While next week’s 10-year auction could ease the current pension situation, the backdrop of record-sized auctions to fund pandemic relief, which Federal Reserve purchases have only partially offset , means that “investors are positioning themselves appropriately for higher rates,” Bank of America strategist Meghan Swiber said in a note.

Yen-based investors are adding to the crisis. They have liquidated old Treasury positions, according to traders in Asia, who have asked not to be identified because they are not authorized to speak publicly. The impact on the repo market stems from how brokers absorbing the Japanese supply of old bonds – those not used in benchmarks – often sell current bonds to cover their positions.

Click here for Scott Skyrm’s comments on the repo market disruption

Procurement announcement

The first of two reopenings of the current 10-year note could ease some of the declines in the Treasury market. The issue began in February at $ 41 billion, and the Treasury Department said the two reopens would amount to $ 38 billion, which would result in an issue of $ 117 billion in mid-April. However, the Federal Reserve is likely to absorb about $ 2.4 billion of next week’s supply, according to Wrightson ICAP economist Lou Crandall, which would dampen some of the supply entering the market.