Traders Bet on Rising US Treasury Yields as Surging Short Positions Drive Up Repo Costs

Traders are betting that US Treasury yields will continue to rise, a wager that could roil the US financing market. A common way to bet on higher yields is to borrow a Treasury and simultaneously make an overnight cash loan to the securitys owner, creating a short position. When demand to borrow a specific note or bond rises, the rate on that overnight cash loan tends to fall or become special, in market parlance. Thats already evident in the repo market. The rate to borrow the current 10-year Treasury fell as low as 2.70% intraday and closed at 3.75%, according to Curvature Securities. By contrast, the rate for Treasuries that arent specified, known as general collateral, was quoted at 3.86% intraday and ended at 3.92%. That shows traders are willing to pay up to borrow certain Treasuries relative to other collateral in the repo market. Whats unusual about the special rate on the current 10-year note is that its set for a second reopen next week. The note already has a fairly large float of almost $92 billion, including about $10.6 billion held by the Fed. The Treasury Department said Thursday it plans to sell $39 billion of 10-year notes on Oct. 7. Theres a deep short base out there and its not surprising theres a lot of shorts in the 10-year, said Scott Skyrm, executive vice president at Curvature Securities. The when-issued announcement and the auction will bring more shorts into the note. I expect the 10-year to continue to richen over the next two weeks. The elevated volatility in the note comes as Treasury yields surge, with the 10-year yield reaching 5.28% Thursday, the highest since 2002, before retreating. The move higher in yields is being driven by a Federal Reserve intent on cooling inflation thats run above target for years, against a backdrop of $100-a-barrel crude, an artificial-intelligence spending boom and a record $40 trillion US debt burden. Last month, traders paid a premium to borrow two- and five-year Treasuries, but that pressure has faded as the Sept. 30 month-end settlement passed and demand is now concentrated in old notes, according to Skyrm. The five-year note sold in August, for instance, fell as low as negative 1% Wednesday, before trading as low as 0.75%.