An unprecedented scene in the U.S. bond market

Powell’s dovish remarks failed to save the bond market, and U.S. bond yields continued to soar intraday. Powell’s “stand-by” attitude also made everyone stare at whether the U.S. debt will set a record today.

During Powell’s speech, the 10-year U.S. Treasury yield rose by more than 8 basis points in the short-term, breaking the daily high, breaking 1.50%. After his speech, it continued to rise, and U.S. stocks even rushed to 1.56% after trading.

As U.S. debt continues to sell off, the repurchase market is showing a frenzy: after the 10-year Treasury bond repurchase rate plummeted to -4% on Wednesday, today it even fell further to -4.25%, which has never happened. The lowest level in history is far below the normal range of -3%-0%.

An unprecedented scene in the U.S. bond market

Regarding the current extreme market conditions, Curvature repurchase expert Scott Skyrm analyzed that only when large-scale shorts appear in the market and market liquidity dries up, will the extreme situation of repurchase interest rates lower than -4% occur.

In the U.S. Treasury bond market, if investors fail to deliver the bonds to their opponents on time, they will be charged high liquidated damages, which is equivalent to 300 basis points below the lower limit of the federal funds target range (repurchase interest rate-3%). The anomaly of the repurchase rate reaching -4% indicates that the market may have a huge short position in Treasury bonds: a large number of short positions have caused bond demand to far exceed the supply level, and ultimately lowered the repurchase rate to a record low.

Market analysis believes that the accumulation of a large number of short positions in Treasury bonds may mean that the imbalance in the U.S. Treasury bond market is not only because traders expect inflation to rise, but there are also huge problems in the market structure itself. If not stopped, it may lead to disastrous consequences. .

Earlier, some analysts pointed out that although some Democrats objected, the Fed may eventually have to take action when the repo market is in turmoil. Extending the SLR (supplementary leverage ratio) is one of the possible options.

The SLR is part of the capital regulations revised after the 2008 financial crisis to prevent large Wall Street banks from taking excessive risks. Before the subprime mortgage crisis, the disadvantage of banks’ various capital adequacy ratio indicators was that they assigned different risk weights to their assets for weighting. But because banks can hide risky assets through financial instruments, they can evade supervision. The final regulatory reform will set the risk weights of all assets to be consistent, which is the SLR indicator for large banks.

However, Fed Chairman Powell’s speech in an online interview overnight did not show that he was very worried about inflation and did not signal possible actions such as “Operation Twist.” This is far from market expectations and cannot calm finances. The turmoil of the market.

The recent bond market volatility “caught my attention.” Until the conditions are met, the Fed will not raise interest rates and will communicate well before reducing QE. And once again emphasized that the Fed will be patient with higher inflation this year. If the inflation rate cannot rise more persistently and full employment is not restored, the Fed will not be able to raise interest rates.

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