Traders are wagering that U.S. Treasury yields will keep climbing, a bet that could stir turbulence in the American financing market.
A common way to bet on rising yields is to borrow a Treasury security while simultaneously providing an overnight cash loan to the security's owner, thereby establishing a short position. When demand to borrow a specific note or bond rises, the interest rate on that overnight cash loan tends to fall—becoming "special," in market jargon.
This has already become evident in the repo market. According to Curvature Securities, the rate for borrowing the current 10-year U.S. Treasury note dipped as low as 2.70% intraday before closing at 3.75%. By comparison, the rate for general collateral U.S. Treasuries—those not tied to a specific security—stood at 3.86% intraday and closed at 3.92%. This indicates that traders are willing to pay more to borrow certain specific U.S. Treasuries than for other collateral in the repo market.
What makes the "special" rate on the current 10-year Treasury note unusual is that the security is set for a second reopening auction next week. The note's outstanding supply is already quite ample, approaching $92 billion, including roughly $10.6 billion held by the Federal Reserve. The U.S. Treasury Department said Thursday it plans to issue $39 billion of 10-year notes on October 7.
"There is a deep short base in the market, so a lot of shorts in the 10-year is not surprising," said Scott Skyrm, executive vice president at Curvature Securities. "The when-issued (WI) announcement and this auction will bring more shorts into this security. I expect the 10-year to remain volatile over the next two weeks."
The heightened volatility in this security comes as U.S. Treasury yields have surged: the 10-year yield touched 5.28% on Thursday, the highest since 2002, before pulling back somewhat. Behind the rise in yields is the Federal Reserve's determination to cool inflation that has run well above target for years, set against a backdrop of $100-a-barrel crude oil, an artificial intelligence spending boom, and the highest debt burden in U.S. history at $40 trillion.
Last month, traders paid a premium to borrow two-year and five-year U.S. Treasuries, but that pressure has faded as the September 30 month-end settlement passed—with demand now concentrated in old securities, according to Skyrm. For example, the five-year note sold in August fell as low as negative 1% on Wednesday before dropping to as low as 0.75%.
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