Repo market activity surged as much as 25% in long bonds on the Treasury's announcement it may revive the 30-year, in what was a sure sign leveraged accounts were repositioning, according to several market participants. The most common trade saw dealers unwinding flattening trades and putting money in the middle of the curve. The 10s/30s curve steepened by 12 basis points on May 4 on the premise of new supply at the long end, with the 30-year yield popping to 4.67% from 4.48%. It could not be determined which dealers racked up the biggest losses in the selloff.
To protect themselves against the flow of money going out of the flattening trade, some dealers tried to stem the tide by offering wider bid/offer spreads on normally extremely liquid securities. "A lot of dealers were making wide markets," said Tom Tucci, executive director of fixed income at Mizuho Securities. He said some dealers had offered two ticks over his bid for 10-year Treasuries, which usually trade at the same price.
Reintroduction of the 30-year may reestablish the U.S. security as the benchmark for long securities. "Last month I was asked where 30-year zeroes were pricing to Treasuries but also to more recent long bonds, such as the French 50-year," said Andrew Brenner, head of global fixed income for Investec USA. He said as the last 30-year Treasury rolled down the curve to be a 26-year bond, it became harder to compare new 30-years against it. New issuance of the long bond would increase liquidity and could narrow bid/offer spreads, agreed Scot Johnson, portfolio manager at AIM Capital Management. He declined to speculate how much spreads could narrow.
Even as many investors took off curve-flattening trades, a surprising number took advantage of the temporary re-steepening to put the trade on again. "Some people are looking at this as an opportunity to put on a flattening trade in levels not seen in two months," said Adam Brown, co-head of Treasury trading at Barclays Capital. The number of investors putting on these trades was not the majority but more than expected, he said.
