There was a great piece in Barron’s yesterday talking about an anomaly in the 10-year treasury repo market: In the past week, traders have been paying premiums to get a hold of 10-year Treasuries overnight in the market for repurchase agreements, where investors sell securities with an agreement to buy them back at a future date.
This is an anomaly. Why?
Normally, investors pay interest to the trader who agrees to take securities off their hands. But last week, they were earning a premium.
So what?
This means there is huge interest from the traders’ side on this trade which in turn implies the investors that these traders are representing, are betting against 10-year bill en masse.
Why the bearish view?
With the expectation that the rates will increase as a result of increase in interest rates, the investors are betting that the prices of longer-maturity bonds will go down.
This trade, if in fact that’s what’s being played, is not without risk but for now analysts at Bank of America think the Fed may extend the maturity of its bond purchases at some point this year.
