Bloomberg News of two days ago has set off a spate of follow-on stories about a “December surge in fails” of 10-year Treasury Notes; that is, cases where settlement of a trade of a 10-year Note fails because the seller or dealer cannot arrange timely delivery of the Note to the buyer. All agree that this signals a shortage of liquidity in the world’s largest financial market, the $31 trillion market for publicly held Treasuries. Analysts give different weights to two causes: quantitative tightening from May 2022 to October 2025; and the current Fed-Treasury agreement to load new debt with issues of very short-term Treasury Bills rather than Notes and/or Bonds–essentially, selling to shadow banks and speculators–while the Federal Reserve purchases $40 billion/month of those Bills.
One Wall Street website tried to be reassuring. “Importantly, the data do not necessarily [!] point to a breakdown in the Treasury market itself. Settlement fails can be driven by a range of factors, including increased short-selling activity, hedging flows, or sudden shifts in positioning [that is, hedge fund speculation -ed]. However, the scale of the recent increase suggests that tighter financial conditions are testing the limits of market infrastructure.”
