$30.5 billion worth of 10-year Treasury trades failed to settle during the week ending December 10, the highest volume of delivery fails since December 2017, according to data from the New York Fed on Friday.
The mess is tied to the Federal Reserve’s shrinking bond portfolio, a tightening plan that’s been in play since mid‑2022. And yes, it’s breaking things.
The failed trades involved the most recently issued 10-year Treasury note. That specific batch came from a $42 billion auction held on November 12. The interest rates for lending that security collapsed so badly that some holders agreed to lend it at negative rates, meaning they gave it away cheaper than they got it back. In this type of repo transaction, settlement fails are almost guaranteed. That’s exactly what happened.
Fed added less supply to the market in recent auctions
Ahead of a Dec. 15 reopening of that same note, traders expected more supply to ease the pressure. That didn’t happen. Instead of the usual market relief, the reopening saw a sharp shortage. This wasn’t the regular “special” rate situation you sometimes see in repurchase agreements. This time, it was worse. And the blame goes to the Federal Reserve again.
At that November auction, the Fed only took $6.5 billion worth of the notes for its own books. That’s a lot less than usual. In February, the Fed had added $11.5 billion to a similar-sized sale. In May, it took $14.8 billion, and in August, $14.3 billion. So, what changed?
Here’s what changed: the Fed’s maturing Treasury holdings dropped sharply. Their System Open Market Account (SOMA) had just $22 billion maturing on Nov. 15, compared to $45 to $49 billion maturing in previous cycles. And since the Fed only reinvests maturing Treasuries above a certain cap, the amount they rolled over fell too.
That cap has changed over time. Back in June 2022, the monthly cap was $30 billion. By September, it doubled to $60 billion. That tightening move directly impacted how much of each auction the Fed could touch. As a result, they didn’t step in to support the November 10-year note the way they had earlier this year. Same thing happened with three-year notes, by the way — smaller add-ons there too.
This left traders scrambling to borrow a note that wasn’t widely available. Which meant more failed settlements, more headaches, and yeah, $30.5 billion worth of broken trades in just one week.
Yields across Treasury curve change after holiday and strong economic data
Markets came back online after the Christmas holiday, and the 10-year Treasury yield barely moved. It fell by less than one basis point, landing at 4.13%. The 2-year yield dropped over 2 basis points, ending at 3.483%. One basis point equals 0.01%, and in the bond world, yields move opposite to prices.
The Treasury curve saw these changes on Friday:
1-month: 3.619% (+0.006)
3-month: 3.633% (-0.011)
6-month: 3.585% (-0.014)
1-year: 3.49% (-0.016)
2-year: 3.481% (-0.029)
10-year: 4.13% (-0.004)
30-year: 4.816% (+0.021)
The moves came as traders processed fresh economic numbers. The Labor Department said jobless claims fell to 214,000 for the week ending December 20, down 10,000 from the week before. It came in below forecasts.
And on top of that, the Commerce Department reported the U.S. economy grew 4.3% in Q1, marking the fastest pace in two years.
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